Thus far in 2012, investors have been getting a real sense of deja vu. Just as was the case a year ago, the economic data have been increasingly bright, while the Federal Reserve’s programs have been providing liquidity to the market. This helped the S&P 500 rise a solid 12% in the first quarter of 2012, mimicking impressive early returns in 2011. Yet as the chart below shows, the rest of 2011 wasn’t quite so kind to the market.

 
Economic data started to appear less robust as the year wore on, and investors grew concerned that the United States may slip back into recession.

Whether 2012 turns out to run its course on a brighter note will depend on a range of factors, some of which I touched on in December 2010. Back then I identified 10 key factors that could affect stocks and the U.S. economy in 2011 [part 2 of that article is here]. Some of these bold predictions have already come to pass and some still may.

Here’s a fresh update on my outlook…
  
What’s coming true
Prediction 1: Jobless claims trend well lower — CORRECT.

Prediction 5: States stop the bleeding — MOSTLY CORRECT.
The risk of a major state default no longer appears likely. About 3% of gross domestic product (GDP) growth this year should help partially repair state budget gaps.

Prediction 6: Individual investors re-embrace equities — MOSTLY CORRECT.
Monthly trading data at online brokerages has been firming, though equity mutual funds are not yet seeing sharp inflows.

Prediction 8: Oil prices start to move toward the $100 mark — CORRECT.

Prediction 9: Latin American stock markets post a fresh surge  — CORRECT.
  
Too soon to tell
Prediction 7: Health care reform starts to take effect.
Some aspects of the health care changes — such as mandatory coverage of mammograms and mandatory insured doctor check-ups — have gone into effect. The rest of the reform plans hinge on a pending Supreme Court challenge.

Prediction 10: Housing springs to life in the fourth quarter.
Inventories of unsold homes are falling, while home-builder confidence is now near multi-year highs. Still, Merrill Lynch now cites the first quarter of 2013 as the turning point for the housing market.
  
Not this year
Prediction 2: Airline stocks take off. 
The faster-than-expected move to $100 oil (prediction 8) has blunted momentum for airline stocks.

Prediction 3: Venture capitalists get desperate.
The IPO market has re-opened in a big way, rescuing VCs as they unload holdings on the general public and not through the merger and acquisitions route.

Prediction 4: Britain’s austerity push gets watered down.
Prime Minister David Cameron has held firm on a range of budget cuts that will soon go into effect. A major backlash is still quite possible for 2013.
 
#-ad_banner-#This time is different
The odds of a major slump — as we saw in the summer of 2011 — are quite unlikely, and the outlook for 2012 is surely brighter. That’s because employment trends are so much better. A year ago, few imagined we’d be speaking of consistent employment gains of more than 200,000 per month. If this figure is exceeded this Friday, April 6, when new employment results will be announced, then it will be the first four-month string of 200,000-plus jobs created in more than five years.

Rising employment tends to feed on itself, because companies start to make longer-term growth plans once concerns of fresh economic weakness have receded. The U.S. economy could well show a bit of a slowdown in coming months, but that is unlikely to materially affect employment trends.

And although stocks took a big hit this week as it became apparent that Fed Chairman Ben Bernanke is unlikely to provide further stimulus to the economy, investors should really be pleased. The Fed is tacitly signaling that the economy is no longer quite so sickly, and the animal spirits of the economy can now do the lifting that the Fed had been doing.

The updated playbook
This coming earnings season provides a fresh opportunity to spot emerging financial and economic trends, as I noted here.
 
You already know what specific stocks I find appealing if you’ve been receiving updates on my $100,000 Real-Money Portfolio. Yet they are simply emblematic of the broader themes in place, and you can plug a range of stocks into your portfolio with similar benefits. 
 
[block:block=16]These themes include:

• A steadily improving backdrop for consumer spending, as can be seen in recent monthly auto sales figures.

• The changing technology landscape that responds to needs for greater energy efficiency and environmental sensitivity (with my picks of Cree Inc. (Nasdaq: CREE), Echelon (Nasdaq: ELON) and Calgon Carbon (NYSE: CCC)).

• A slowly improving banking sector that is trading up from its below-book valuations now and should see rising profits and dividends in 2013.

• A relative emphasis on U.S.-focused companies as U.S. GDP growth looks set to stay well above European growth rates.

Risks to Consider: We may be underestimating the problems in Europe. There’s still a chance that Europe’s weakest economies hit the skids as austerity programs create a cycle of deeper recessions. If so, then U.S. stocks would be headed for a swoon like we saw last summer.

Action to Take –> A brightening macro-economic backdrop has helped stocks get off to a great start this year, benefiting virtually every portfolio. Yet we’re shifting into a stock picker’s market, where specific stock selection should benefit investors just as much — if not more — than the macro trends. If history is any guide, then this is a good time to build up cash reserves by taking some profits, so you can step in for bargain hunting in case the market pulls back.