There are known unknowns, as former Defense Secretary Donald Rumsfeld famously said, and then there are unknown unknowns.
Investors spend as much time guessing about unknowns as military strategists, and this year there have been plenty of imponderables. Few people foresaw the uprisings in the Middle East or the spike in oil prices that followed. The Japanese tsunami came out of nowhere. The death of Osama bin Laden was a sudden surprise that may signal the retreat of Islamic terrorism.
Yet other factors affecting the global economy have been more predictable. The European debt crisis that's now dominating financial markets has been building for more than two years. Exact developments have been hard to predict, but the overall problem hasn't been. Political gridlock in the United States—and paralysis on important economic issues--seems like another given that's likely to continue. We can also probably count on the Federal Reserve to wave its magic wand again if it looks like another recession could occur.
The next year or so is sure to entail a few momentous events that nobody can predict. But there will also be several developments that investors ought to see coming. Here are 11 important dates that represent events likely to impact financial markets. See a slideshow version of the 11 key dates. The fact that they mostly involve political events reveals the extraordinary (if unnerving) degree to which policymakers control the global economy at the moment:
December 31, 2011: Two important U.S. stimulus programs expire.
Unless Congress extends the measures, the federal Social Security payroll tax rate will rise from 4.2 percent back to 6.2 percent, its normal level, which will cost the typical taxpayer about $75 per month. And a federal extension of unemployment benefits will end, pushing the maximum benefit period down from 99 weeks to the 26 weeks that's typical in most states. Moody's Analytics estimates that if both programs expire on schedule, it will lop 1.7 percentage points off GDP growth in 2012, which might be just enough to trigger another recession.
Congress had a chance to extend those programs as part of the recent "super committee" deliberations over the national debt, which of course ended in total failure. Congress could still pass temporary extensions of those programs, which President Obama has requested. But the political environment on Capitol Hill seems so fractious that lawmakers might not even agree on whether to hold a meeting. Congress hopes to adjourn for the year on December 8, so barring an extended session that stretches into the holidays, the fate of these two stimulus measures ought to be known by then.
January 24-25, 2012: Federal Reserve open-market committee meeting.
If the Fed feels more "quantitative easing" or other stimulus measures are needed, it could announce them at this confab. Economic data for the end of 2011 are likely to be modestly positive, which could preclude any additional Fed action. But if Congress decides not to enact any more fiscal stimulus, the Fed might feel more monetary easing is necessary. Since the Fed moves markets, any policy change in 2012 will be significant.
Early February 2012: Italy's funding problems could become acute.
Italy has enough cash on hand to make it this far without suffering a rupture caused by the high interest rates it's been forced to pay lately to borrow in the private markets. But starting around this time, Italy will need to begin refinancing roughly $300 billion worth of bonds coming due in 2012, or about 12 percent of its total debt. If still forced to pay interest rates of 7 percent or more, the high cost of borrowing that much money could overwhelm Italy's economy and trigger the sort of financial crisis investors have been dreading. Italy's government could very well pass economic reforms by then that help boost confidence in its ability to manage its finances, and lower borrowing costs. But the intensifying battles between politicians reluctant to impose pain on their citizens and investors demanding greater fiscal discipline have become more and more likely to go down to the wire.
Late February 2012. Greece will need its seventh tranche of bailout funds.
Fury has erupted in Greece over the tax hikes, deep spending cuts, and dismantlement of the welfare state that have come as a condition of getting a continuing flow of bailout funds from other European nations. And Greece must still enact more reforms in order to keep getting the money. At some point, Greek voters may say no, implicitly agreeing to leave the euro zone, return to the drachma, and deal with the severe consequences—which would reverberate throughout Europe and the rest of the world. The crunch could come around the time Greece needs to prove it deserves a seventh bailout installment. Greece has also tentatively scheduled elections for February, which could fuel political brinksmanship.
March 6, 2012: Super Tuesday in the Republican presidential primaries.
If front-runner Mitt Romney sweeps many states, as expected, his candidacy in the general election could start to seem like a sure thing after 10 states hold their primaries on this day. If so, investors will start to plot the implications of an Obama-Romney race, which could be a plus for markets since neither candidate has proposed radical changes that would upend the status quo.
March 13, 2012: Federal Reserve open-market committee meeting.
The Fed will once again debate whether to enact more quantitative easing. Some economists expect the economy to weaken at the start of 2012, as foreclosures pick up and consumers who overspent during the holidays hunker down and start trying to save again. By March, financial developments in Europe may also have caused an economic shock that hits American shores. If so, the Fed could pull the trigger on new stimulus measures at this meeting.
April 2012: Results of the Federal Reserve's latest bank "stress tests" are due around this time.
The Fed has formalized this annual procedure--initiated during the financial crisis in 2009—and expanded it to cover 31 financial institutions with assets of $50 billion or more. It's a laborious process for banks, which must assess how they'd operate if GDP and the stock market plunged by levels that would characterize a recession far worse than the one in 2008 and 2009. Alarming results would startle the markets, but that seems unlikely. When the Fed published its stress-test results in May of 2009, it helped restore confidence in the banks and set the stage for a huge stock-market rally. Something similar could happen next year, at a time when there are major worries about how U.S. banks would weather a European financial meltdown.
June 26, 2012: Utah holds the last Republican primary election.
If the nominee turns out to be somebody other than Romney, there could be more market turbulence as investors try to gauge the ramifications of Rick Perry's anti-regulatory ax, Herman Cain's 9-9-9 tax plan, or Newt Gingrich's determination to kill the capital-gains tax and slash the corporate income tax.
July–November, 2012: The U.S. presidential campaign.
Gridlock? You ain't seen nothin' yet. With the presidential campaign in full swing, it seems unlikely that Congress will pass any measures requiring tough decisions. The good news is that another decision on whether to raise the U.S. borrowing limit—which prompted the ugly and pointless showdown last summer, and triggered the first-ever downgrade in the U.S. credit rating--won't be needed until the first half of 2013. And Congress has already passed $1.2 trillion in spending cuts set to begin in 2013, which will start reducing the debt. The biggest problem for markets would be a fresh downgrade of the U.S. credit rating or some other event requiring legislative action before Election Day.
November 7, 2012: The day after the presidential election.
The lame-duck Congress will have important work to do once the next president is elected. The Bush-era tax cuts, extended for two years by President Obama, are scheduled to expire at the end of 2012. If that happens, taxes will shoot up for most Americans in 2013. The most likely outcome may be another one- or two-year extension of the lower tax rates for most Americans, giving the president time to work with Congress on comprehensive tax reform during the crucial sweep spot that comes after a national election.
January 20, 2013: President Obama, or his successor, is sworn in.
The next president won't have the luxury of leaving the nation's mushrooming debt problem for the winner in 2016. That means far-reaching overhauls of the tax code, Medicare, Social Security, and Medicaid will most likely dominate the next presidential term. With a sharp boost in taxes unlikely, voters may have to warm to changes such as a rising retirement age, cutbacks in benefits for seniors, and perhaps the privatization of some aspects of Social Security and Medicare. If this can be done without inducing a recession, it could be a long-term plus for financial markets, since government spending would be replaced by private spending, including more retirement funds flowing into stocks and bonds.
The unknowns: The economy and the financial markets won't follow the schedule that policymakers lay out, of course. "Bond vigilantes" demanding higher rates on European bonds could trigger a financial crisis before politicians in Greece, Italy, and other nations work out reforms meant to ease the pressure. The worst-case scenario for 2012 is probably a total breakup of the euro zone, which would have consequences the smartest investors can only guess about. There's also the chance that politicians will come through in the end, and solve the economy's most vexing problems. Make sure to leave an opening on your calendar for that.