Monday, December 31, 2012

James Paulsen: 2013 Investment Outlook

2013 Investment Outlook

by James Paulsen, Chief Investment Strategist, Wells Capital Management
We expect 2013 to deliver a fifth consecutive year of positive equity returns. In the last four years, the S&P 500 has produced almost a 15 percent annualized total return (compared to only about a 6 percent annualized return from long-term government bonds and while inflation only annualized 2.3 percent) despite a cultural mindset dominated by numerous fears and widespread doubts which chronically warned investors to be careful. That is, the bull market recovery has thus far climbed a perpetual wall of worry. Next year, however, a slow but steady rise in confidence will likely drive the S&P 500 above its previous all-time high of 1565 and perhaps even as high as 1700 sometime during the year. Although earnings may only rise modestly, improved equity valuations, pushed higher by a more confident investor with an elongating horizon, should prove the primary catalyst for the stock market. Moreover, improved confidence may also finally bring havoc to the bond market. Rising yields could result in negative bond returns encouraging a reallocation of mutual fund flows back toward equities.

Several key points regarding this outlook are worth highlighting.

Consensus economic growth expectations are too low

The consensus forecast for only 2 percent real GDP growth next year is tied to an expectation of significant fiscal tightening. Even though fiscal policy will be a headwind for growth in 2013, the degree of fiscal drag is probably overstated. The most likely outcome is a modest austerity program (tax hikes and spending cuts) implemented slowly over many future years which should not overwhelm economic growth. Furthermore, several other positive forces are being overlooked which should more than compensate for a bit of fiscal tightening.  (more)

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