The future of 2012 may be ominous based on the Mayan calendar, but it doesn’t look like the world is going to end on the stock market.  In fact, it looks like 2012 could be a pretty good year for investors.  It’s easy to be optimistic when thinking about a brand new year.  But, I have my reasons for being confident.

First Five Trading Days

One of my favorite stock market indicators is the First Five Trading Days.  Historically, if the stock market goes up for the first five trading days, there is a 69% chance the stock market will be up for the entire year.  The more positive the first five days are, the more likely it will be a good year.  For 2012, the first five trading days were definitely positive.

• Dow +1.43%
• NASDAQ +2.65%
• S&P 500 +1.82%

Stock market indicators shouldn’t always be relied upon, because they seem to fail investors at the worst possible time.  Many feel the First Five indicator is hyped more by brokers than is justified by the returns.  But, a solid start to a new year is always welcome, especially after the lackluster performance from last year.

The Economy is Improving

I wouldn’t say the economy is great, especially for the working class, but it is definitely getting better.  The stubborn unemployment rate is slowly dropping and consumer optimism is starting to return.  Retail sales are up slightly, especially for automobiles.  There is a lot of pent up demand from consumers who have tightened their belts for the past couple of years.  Their cars, computers and appliances are starting to wear out and need replacement.

The bad news for the markets is that profits are shrinking as companies are forced to hire and inflation is taking a bite out of their bottom lines.  They had a field day during the recession with drastic layoffs and squeezing the remaining employees for maximum productivity.  But, the tide is starting to turn and opportunities are opening up for skilled employees.  Wages will start to rise.

It’s an Election Year

Election years have had a very positive correlation to the stock market.  Looking at the last 21 election years since 1928, all but three have been positive for the S&P 500.  Of course, one of those three election years was 2008 and we all know how badly that turned out.  The average S&P return during these past 21 election years is around 11.8%, which I would gladly take this year.

This election year is about a lot more than just a quick pop in the S&P 500.  It’s about the future direction of our country and our economy.  Do we continue to slide into debt while special interests loot our treasury?  Or, do we return to the economic powerhouse that has led the world for the past century?  Only time will tell.

The Bottom Line

The bottom line is that past performance isn’t a guarantee of future results.  We are still living in troubled times, considering the shaky state of our financial system and the massive federal deficit.  But, unless there is a major financial meltdown of some kind, 2012 should be a pretty good year.

“Cheers to a new year and another chance for us to get it right.”

Oprah Winfrey – American Talk Show Host

Recommended Reading

Squirrelers – Looking Forward to your Financial Success in 2012
Money Cone – 10 Stocks for 2012 and Beyond
Wall Street Journal – First Five Days of Trading Suggest More Upside

This post was featured on the Carnival of Personal Finance over at Diva in Debt.  If you aren’t familiar with the Carnival of Personal Finance, you need to check it out.  It’s where all the cool bloggers hang out.

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