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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