Early stocks trade in January has started positively with the tech-heavy Nasdaq index up 2.65% since New Year, but will this be a new and more positive year for us? Last year the Yanks ended in positive territory but we were down over 12% for the calendar year.

It was a smaller drop for us of course when you throw in dividends, and anyway, I only care about my returns on a financial year basis, as that’s when I pay tax on my SMSF’s investments or pocket my tax rebate!

And by the way, even though it has been punishing watching stock prices over the last calendar year, we have had two positive financial years for stocks when you include dividends and franking credits. I know one of my colleague’s portfolio returned a dividend yielded of 4.7% for the year, despite the fact he is fully invested in stocks that will roar back when the Euro-anxiety is eventually put to bed.

Optimists vs Pessimists 

For the optimist, a local survey of investment managers showed 43% of professionals are optimistic about equity markets for 2012. Of course, that means 57% are not, but it’s a much closer run than many so-called doomsday merchant experts would have us believe.

Over in the USA, a Goldman Sachs’ survey of investment strategist saw the prediction that Wall Street key indexes are heading for a 7% gain this year. But that said, in the first two weeks of the year, investors are ditching stocks for municipal bonds.

So while the professional experts think stocks are the place to be in 2012, the amateurs — the retail investors of the USA — won’t cop the tip. This is the European black cloud effect and it will rain on our parade this year until a credible set of policies from regulators and European Union (EU) governments are in place. That will take time but I reckon we will see it before mid-year and that will help out stocks.

If it doesn’t happen, then stock prices will be pressured by that old cliché (which works so often): “sell in May and go away”.

Underlining the role of Europe on share prices was a comment last week from the new Italian Prime Minister, Mario Monti, who warned about a lack of teamwork from EU regulators and that sunk Wall Street after the good job figures should have taken the market up.

The European recession

Another challenge for stock prices will be how many EU countries go into recession. This will be a running tally that will be a negative force pulling down stock prices and that’s why we need to see the US remain stronger than expected. We also need to see China’s economic data come in on the high side as well.

Last year I was always confident on my economic calls but I was never happy about making market predictions based on the pesky and self-interested politicians of Europe.

I expected the US to avoid a recession and grow pretty well and I terrorised the Reserve Bank of Australia over their silly interest rate policy, considering how challenged our economy was, especially with a weakening world economy. However, my economic and financial training never qualified me to understand European politicians.

We are in their hands again this year, and with the Yanks set to go to the polls in November, Barack Obama – who is ahead in the polls against the Republicans at this stage – doesn’t need a European recession hurting the US economy.

Watch this level

We are in a work-in-progress situation now and the level on the S&P 500 I will be watching is 1,300, which is now at about 1,278. If the Yanks can bust that level, we could see some investors come back to the market and upwards momentum could start.

By the way, this index is up around 19% from its low last year and that at least shows that US markets have become a more positive over the course of 2011. Against this, our market has only come back around 6.5% and that’s why I’m hoping on something big and positive by June 30.

But as I have argued — we are in the hands of those pests in Europe and there’s a fair bit coming out of that place this week that could move the market.

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