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The Winning Game Plan for Stocks in 2012

The outlook for many other sectors depends on the pace of employment gains and changes to the Federal Reserve's interest rate stance. If the economy really gains a head of steam, then consumer discretionary stocks such as Disney (DIS), automakers such as Ford (F) and GM (GM), and a wide range of retailers are bound to benefit. The fact that retailers such as Kohl's (KSS) and Macy's (M) trade for around 10 times projected fiscal (January) 2013 profits could start to attract bargain hunters. Best Buy (BBY), trading at just 7.5 times projected (February) 2013 earnings, may be the best value among large retailers.

Is that backdrop likely? Well, a look back to 10 years ago may be constructive.

In 2001 and 2003, the U.S. economy shed a combined 2.4 million jobs. By 2003, investors were still fretting about a "jobless recovery." You hear that same refrain today, but if history is any guide, then employment trends may finally perk up in 2012. So if the U.S. economy creates 2 million new jobs in 2012, then you should expect a solid market rally.

Of course, every silver lining has a touch of grey (as noted by the Grateful Dead), and an improving economy would likely lead investors to start thinking about interest rate hikes. Rates are so low that even a moderate boost in rates would still be quite benign in terms of the broader stock market. But rate-sensitive stocks such as utilities, telecom-service providers and other yield plays would look comparatively less appealing once government bonds start to offer more respectable payouts.

The outlook for industrial stocks would be decidedly mixed. An improving U.S. economy surely helps, but prolonged economic weakness in Europe and Japan, coupled with a possible slowdown in China would likely crimp export demand. Goldman Sachs expects sales growth for U.S. industrials to slow from a projected 10% in 2011 to just 6% in 2012. Still, many industrial stocks such as Ingersoll-Rand (IR) and Caterpillar (CAT) appear fairly inexpensive at around 10 times projected 2012 profits.

Risks to Consider: It may be a bit too soon to predict a healthy U.S. economy for 2012. A resolution to the European crisis would surely help, not only to stave off a deep recession in that part of the world, but to remove the psychological overhang for U.S. stocks.

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