2013 Forecasts Tough to Make; 2012 Performance Builds Confidence

Predicting stock market performance is about as sure-fire as predicting the weather. This year-end adds additional factors to the mix – tough negotiations among lawmakers over the so-called fiscal cliff, the possibility of automatic spending cuts and tax increases – all of which make predicting market outlook for 2013 an exceptionally tough act. If Democrats and Republicans can’t hammer out a deal on taxes and government spending before year’s end, the fate of their discussions could generate significant market volatility in the first quarter. Many analysts expect that an accord will be reached, though few believe the two parties will be able to do so by Dec. 31, 2012. The hope is that matters will be settled in the first few months of 2013. At this point, even with the spending/tax deal as yet unresolved, Wall Street experts are tending toward greater optimism.

In 2012, the stock market climbed the so-called “wall of worry” despite a world of political tension and global economic crises. By mid-December, stocks were posting a year-to-date advance of some 12 percent in the Standard & Poor’s 500. Many experts and individual investors have seemed unwilling to embrace and applaud the market’s positive gains in 2012. (Kiplinger’s dubbed it “the bull market everyone loves to hate.”) The year’s statistics indicate that – despite the negativity that it is at total odds with its performance – the market had a successful year. Many individual investors have remained reluctant to return to stocks sticking with other investment vehicles whose performance has lagged significantly behind the stock market.

Some investment analysts believe that the tide might be turning and that investors who have deserted stocks for bonds could be ready to return. Bonds are posting single-digit gains and, despite their reluctance to acknowledge the recent rally, individual investors can’t ignore the fact that stocks significantly outperformed the bond market in 2012. They point out that stocks in many market sectors are trading below their long-term average price-to-earnings ratio. Consumer staples remain good buys, as do healthcare and energy stocks.

The bulls believe that success generates confidence and are looking for continued, steady gains in mean prices for S&P listed stocks. This optimism has not been shaken by predictions of slow corporate earnings growth in 2013. The optimists believe U.S. investors’ fears concerning Europe’s sovereign debt have moderated – although the financial problems in Europe still remain. The same appears to be true for the issues facing emerging markets. Investors appear to have recognized that though growth may have slowed, indications abound that China’s slowdown has bottomed out and that other Asian nations are showing similar stabilizing patterns.

The more cautious commentators note that earnings growth and profit margins should remain an area of concern. The stock market might be due more respect, but they note that individual investors returning to the market should recognize that the new bull run is different from previous ones. Spending cuts and tax increases in 2013 might change consumer spending habits, and fortune is likely to favor cash-rich companies that carry little debt.

The commentary above is intended as general commentary and is not meant to be a substitute for expert advice from your tax and investment professionals.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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