Stock Market 2012: Optimism, Pessimism, or Stoicism?

When it comes to the stock market in 2012, should we be optimistic or pessimistic?

The Wall Street Journal's Jonathan Cheng recently had an article entitled "A New Year, the Same Ol' Pessimism" on how Morgan Stanley's chief US equity strategist Adam Parker believes that there will be a bear market in 2012. Cheng: "Mr. Parker...is the most bearish market strategist at any major Wall Street firm when it comes to forecasting the outlook for stocks in 2012. He took the same pessimistic position last year -- and it turned out to be the most accurate."

Cheng discussed that Parker "considers his peers excessively optimistic on the likely strength of US company earnings." While there may be earnings disappointment in the US, the financial crisis in Europe could also have negative effects on the market, lingering like a dark cloud. Cheng: "Parker predicts the Standard & Poor's 500-stock index will close the year at 1167, 8.7% below Friday's close of 1277.81. The average prediction from strategists at 13 banks is for a finish of 1334, or 4.4% higher than Friday's close."

In predicting stock market performance in 2012, Cheng noted that Parker views the "overall economic environment" as the biggest risk. Cheng: "Europe's debt troubles are far from resolved, and the US is heading into an election season that will likely add more uncertainty to the global business outlook." Cheng concluded in that Parker is advising his clients to stick with investment strategies that worked well in 2011. Parker: "There is something psychological about starting the year afresh, but the truth is corporate profits and macroeconomic trends don't turn with the calendar." In short: "Earnings will disappoint. Europe headwinds will remain. Buy dividend stocks. Avoid financial stocks. Avoid materials stocks."

In speaking on the subject for MarketWatch, Cheng discussed how Parker was at first "pretty lonely on Wall Street" with his bearish sentiments. That being the case, Parker's forecast for 2011 finished the year off by 2 percent. Cheng reiterated that there is still a lot of uncertainty in the global markets owing to European debt and growth in China. At the close of the interview, Cheng discussed how analysts are saying that "macro matters" with respect to the stock market.

While Morgan Stanley's Parker maintains a bearish sentiment, TheStreet.com's Doug Kass recently discussed reasons for bullish optimism in the market. Among these reasons for optimism, Kass mentioned the relative superiority of the US economy as compared to most of the world's economies "in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations." Even further, Kass discussed the health of the US banking industry going forward and the viable strength of US corporations. In pertinent part for reason to be optimistic, Kass also mentioned that "[t]he US consumer is more liquid and stable", "[t]he US is politically stable", and "[t]he US is rich in resources."

One reading Kass' optimistic sentiments may think that he is looking at the market with rose-colored glasses. However, even with such optimism, I am reminded of a previous article written by Mr. Kass December 1, 2011. With the ominous heading of "Doom and Boom", Kass discussed a technical pattern that appeared to be emerging at the close of 2011: George Lindsay's Three Peaks and a Domed House. What appeared to be an approaching downturn seemed to serve as a parallel to what occurred in July 2011. Kass: "If the pattern of Lindsay's 'Three Peaks and a Domed House' continues, a sharp upside move in the stock indices appears possible."

At the time, it did appear that a Three Peaks and a Domed House pattern would emerge. Kass even commented on the emerging pattern as compared to the S&P 500, "It is almost eerie." While the actual S&P 500 did not mirror the graph in Kass' "Doom and Boom" article, in late November 2011, it would have been easy for one to think that the market would experience a sudden rise (perhaps even to 1350) only to later suffer a catastrophic fall -- perhaps a rise and fall precipitated by events in Europe or the Middle East.

Even so, as we all know, during the respective time period as in Kass' article the S&P 500 failed to pierce the 1300 mark. One might say that things balanced themselves out. I recently discussed TheStreet.com's Robert Holmes' analysis of the S&P targets for Wall Street's biggest firms. The average of the firms discussed appeared to be 1348, and while there may be bullish sentiment on Wall Street, Goldman Sachs' forecast had the S&P 500 finishing 2012 at 1250. That being the case, Morgan Stanley's Adam Parker is by no means alone in having a bearish sentiment.

The interplay of optimistic and pessimistic sentiments regarding the stock market may leave one wanting to find a stoic balance between the two. Approaching the stock market in the spirit of Stoicism may be for the best right now. Given the volatility and uncertainty in the markets right now, traders could follow the advice of the Stoic philosopher Marcus Aurelius: "Give thyself time to learn something new and good, and cease to be whirled around." (What better time for traders and investors to learn than in a bear market?) Given the volatility and uncertainty in the global economy, one following the stock market may very well be in search of tranquility: a yearning to be stoic.

Even so, going along with Kass' recent optimistic article, one cannot help but feel that even with peaks and valleys in the market, life goes on. Back in October 2011 while comparing the stock market crashes of 1929 and 2008, I commented that "it is still pretty much business as usual in America." Even in light of the European debt crisis, a slowdown in the Chinese economy, US political uncertainty, and tension in the Middle East, life goes on. While investors and traders are waiting for resolution or clarification to some of the planet's biggest socio-economic and political issues right now, perhaps time will heal things. Maybe the solution that we are all waiting for is time. As I closed my aforementioned article in October 2011: "At the very least, as long as we continue being able to secure our daily bread, the US economy should rebound eventually -- in due time. When all is said and done, this too shall pass."

On the topic of Iran and nuclear weapons, a recent article from Breitbart stated that "Israel is preparing for Iran to become a nuclear power and has accepted it may happen with a year." Far from an emotional statement of fear, anger, or sadness, I found the wording "has accepted" to be quite interesting. Even so, the article states that, "Israel has so far maintained it will do all within its power to prevent Iran from obtaining nuclear capabilities, but has shifted its position following recent United Nations' reports." As time passes and the saber-rattling has intensified, the situation with Iran has appeared more and more precarious. Nevertheless, it would appear that Israel is resolved in that Iran will probably become a nuclear power. While Iran becoming a nuclear power may not be the resolution that the West would have wanted, at the very least, acceptance of a nuclear Iran shifts the market outlook as to possible military action (or lack thereof) -- at least in terms of preventing Iran from gaining nuclear weapons.

While political uncertainty in the US has been a hot issue with respect to the stock market, to a certain extent, there may be reason to believe that American society will find a sense of political tranquility after the next election -- tranquility not in the sense of political success of one side or the other, but in acceptance of political realities. Even in the scope of ideological polarization, there comes a time in the ebb and flow of political discourse when ideological battles must end.

A recent NPR interview between NPR's Robert Siegel and Gideon Rose highlighted some stable aspects of global political ideological battles. Rose discussed how the desire to find utopia is subsiding as political ideologies come into balance. Rose: "The current order is fraying around the edges. But it's a matter of going back to what we already know how to do, rather than finding some new Utopian alternative just around the horizon." Rose later said, "We're living in the world that you would have seen in 1950, I think, in a way that we're not...living in the world of 1910." In so many words, it is as if humanity is giving up on finding utopia via ideology. Yes, without angels to fill the vacuum of our "dominant doctrines", fools may rush in, but one would hope that we have learned from human history regarding problems with respective ideologies.

In taking into account the rhetoric of political commentators, both liberal and conservative alike, one cannot help but feel that the best medicine for political polarization in America is a sense of resolve (if only to agree to disagree), i.e. being at peace with the back-and-forth of liberal versus conservative ideologies. Even so, at some point, the liberal vs. conservative interplay will come to an end. Where Americans may be frustrated with their politicians and the path of Congress, a sense of inner tranquility brought about from finding peace in our current predicament may go a long way.

If we transpose this desire for tranquility to the markets, traders and investors alike, in hoping for the best yet expecting the worst, can find themselves in a better position than those who flock to the extremes of optimism and pessimism. Up or down, there is something to be said for peace of mind when it comes to the stock market. In this way, perhaps Morgan Stanley's perspective (though bearish) may be seen as a bit optimistic. And those who believe that the stock market will finish in 2012 where it started may be considered optimistic as well. At least, there is hope that there will not be a 20 percent plunge over the course of 2012. And even if there should be a plunge, we would do well in hedging via a resolute sense of inner peace with whatever happens.

There is no shortage of those who would want us to believe that we are heading for an economic doomsday. However, with the prospect of financial doomsday, I am reminded of Nordic-American Tanker NAT CEO Herbjorn Hansson's comment on CNBC's Mad Money: "I am a development optimist for the world economy because essentially in planning, you have two extremes: The world doesn't go on and the world goes on. And, you know, it's difficult to plan if you assume that the world doesn't go on." In that light, even if the stock market ends in 2012 where it began, you almost have to be an optimist...or at the very least, a stoic.

Whether the stock market goes up or down, in this day and age traders and investors may want to remember the words of Stoic philosopher Marcus Aurelius, "The universe is change; our life is what our thoughts make it."