Over the last couple weeks, I've received my fair share of economic outlooks, most of which offered a dark and gloomy picture for the upcoming year, given all the negative news surrounding the Eurozone. But Adrian Day, president of Adrian Day Asset Management, believes all that bad news is already priced into the stock market. He stopped by Registered Rep.'s offices today with some good news: We're in for a short and sharp rally in early 2012, which could be as high as 20 to 30 percent.
While U.S. stocks are not at bear market lows, they are selling at reasonable valuations, especially large caps. Meanwhile, European stocks, Day said, are at bear market lows, trading at two times earnings, and this provides a great opportunity for investors. In the last two to three months, Day has upped his allocation to European stocks to 20 percent.
Right now, investors are underinvested, with retail investors pulling money out of the markets for the last four years, and institutional investors with lots of cash on the sidelines, Day said.
"I don't think you have to have economic resolution to have a rally," he said.
But he also doesn't believe retail investors will jump on this rally (big surprise). Day said retail investors want to see the stock market stabilize somewhat before they get in. They can't stomach the volatility, even if it means a bumpy 20 percent return.