With all the focus in the financial news these days on the looming "fiscal cliff," not to mention China's economic malaise, the debt crisis in Europe and Middle East brinksmanship, it is understandable that markets are growing increasingly volatile, and investors increasingly anxious. The truth is, though, that many prognosticators are saying that 2013 could actually be, at the very least, an okay year for investors. Maybe not a great year, but a positive one.
Mike Gibbs, co-head of the equity advisory group at Raymond James, sees the question as being whether 2013 turns out to be a pretty good year for investors or a mediocre one. "A lot has to do with what Congress and the White House do about the fiscal cliff," he says. "If they kick the can down the road into next year and try to use 2013 to reach a 'grand bargain' sometime between June and September, then you have the S&P Index stuck in a trading range of 1350 to 1450. On the other hand, if they get something done, and cut federal spending, you get a 1.5% drop in GDP, but CEOs start spending again, and you could end up with back-end growth in GDP of 2% for the year."
In that event, he predicts, the S&P Index could end up in the 1400 to 1560 range for the end of the year. "That would represent a 12% gain in equities on the top side, including dividends." Odds are that things will fall somewhere in the middle, says Gibbs, with equities showing a one-year gain next year in the "high single digits."
A gloomier view comes from Francisco Torralba, economist in the investment management division at Morningstar. "Companies are very wary of making any investments," says Torralba, referring to the more than $1.3 trillion in cash that U.S. corporations are reportedly sitting on. "One hopes that there would be a pick- up in corporate spending if the budget impasse is resolved," he says. But that would still leave him concerned about a worsening of the Eurozone debt crisis and the economic slowdown in China. More important, Torralba sees the U.S. economy as possibly being at an "inflection point," and heading toward a new downturn. His reasoning: "The normal course of the business cycle has played out. We've had several years of modest growth, and it's certainly possible we could have a mild pickup after the fiscal crisis is settled, but I don't expect the economy to grow at even a modest 2% to 2.5% for more than two years."
Torralba, speaking in mid-November, said investor sentiment has been "too bullish," which is often a sign, in retrospect, that a market was overvalued. He also says that in his view and that of Morningstar's tactical allocation committee, "both the S&P and long-term U.S. Treasuries are currently overvalued."
WHERE TO FIND THE UPSIDE
For Gibbs' part, his relatively optimistic view of the coming year's outlook leads him to suggest people should invest in dividend-paying companies, "but only those that are raising their dividends because their earnings are increasing."
He says that in the near term such companies may be unpopular, particularly as there are expectations that any debt/budget deal will include a hike in taxes on dividends. He says, "As an investor, I would buy into that lack of interest," which he says has made dividend-paying firms undervalued. As for the bond market, he argues that interest rates are being held down by the actions of central banks, both in the U.S. and Europe. "Investors have piled into bonds, and are over-invested in them. As long as the Fed keeps pumping in liquidity, they'll be okay, but the potential to lose your principal is great if interest rates start to rise. Over a longer period, investing in bonds at these current interest rates is not a good idea," he cautions.
Torralba, with his more negative outlook on 2013, says investment strategy should depend upon the investor's time horizon. Shorter term, he suggests reducing equity holdings, especially small and mid-cap names, and also shifting from long-term Treasury holdings to shorter maturities and to investment-grade corporate debt. Longer term, he likes large-cap U.S. as well as European and Japanese equities, and international REITs.
Many economists and investment strategists, of course, are sandwiched between these two extremes. Hal Ratner, head of capital markets at Morningstar, suggests that investors need to lower their expectations for next year. "We're looking at fairly low returns in 2013," he says. "People should not expect to see the equity markets come roaring back after the fiscal crisis is resolved. You have a global economy that's stagnating or in some cases getting weaker, but aside from that there are no immediate concerns except for the Euro debt crisis, and they should keep that under control too."
He expects to see continued deleveraging and slow growth for the next five to seven years, "until we see a recalibration in how the developed and developing worlds relate to each other." His prediction for 2013? "Boring is the good scenario... because the other ones are a lot worse."
Brian Gendreau, a market strategist at Cetera Financial, looks at 2013 and says that assuming a resolution of some kind to the "fiscal cliff," we should see "an extended period of slow growth," though he thinks that it may end up being "slightly better" than the current consensus forecast of 2.2% growth in GDP.
There are a number of factors that will prevent things doing much better than that, he says, including the recession in Europe and slower growth in China, but at the same time, he notes that retail spending and housing are both improving domestically, which should underpin continued economic growth. All that leads him to predict that the S&P, which in mid-November has been testing the mid 1300 range, could rise to 1450 by the end of next year. "We are not going to see a blow-out year for equities in 2013," he says. "I'd expect a range of 1200 to 1600 for the S&P, with the upside more likely than the downside." With all that in mind, and with the likelihood that the Fed will continue holding down interest rates as promised through 2014, Gendreau recommends that investors stay substantially in equities, which he argues are "currently underpriced, with forward earnings at an all-time high." He says investors should focus on domestic equities, and adds that if they want overseas diversification, it should be in emerging markets, not developed ones.
Within domestic equities, Gendreau says Cetera is recommending a "barbell strategy" of growth stocks, especially technology companies and high-dividend-paying stocks.
Gendreau's advice to advisors whose clients are long-term investors saving for retirement is, "Tell people to hold tight. If investors don't foresee any need to raise cash in the coming year, there's no reason for them to do anything radical with their portfolios."
Meanwhile, for those with longer horizons who may be anxious about the coming months and this first year of the new Congress and the president's second term of office, there's Vanguard's outlook on the equities market, which predicts that the "highest probability" for equity markets over the next decade is for a 4% to 8% annual gain (23% chance).
The company sees a 20% chance for either a 0 to -4% annual loss or an 8% to 12% gain, and a 12% percent chance of either a -4% to -8% loss over the period.
The company recommends, as always, a diversified portfolio with some assets allocated to bonds, and warns investors to "treat the future with the humility it deserves."
Dave Lindorff is a freelance writer and a regular contributor to the magazine.
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