Why 2013 May Be a Very Good Year

What if the future is more bullish than the bears assume? With 2013 approaching, stock market volatility seems to have increased. Equities rise on optimistic remarks about a fiscal cliff solution, then fall when another voice expresses pessimism, and vice versa.

In addition to this constant seesawing, the market is contending with anxieties about Europe, with the eurozone now officially in another recession, and the strong possibility of higher taxes on capital gains and dividends in 2013 plus surtaxes on varieties of net investment income.¹

Even so, 2013 may turn out to be a good year for stocks. Our economy looks to be healing, and that may give investors around the world more optimism.

A housing comeback appears evident. Our economy won’t fully recover from the downturn until the housing market does. We have strong indications that this is happening. The October report on existing home sales from the National Association of Realtors showed a 10.9% annual improvement in the sales pace, with the median sale price rising 11.1% in a year to $178,600. (The median sale price increased in October for an eighth straight month.) The Census Bureau noted a 17.2% annual rise in new home sales in October. Lastly, the Conference Board’s November consumer confidence poll found that 6.9% of respondents planned to buy a home in the next six months. In November 2010, less than 4% did.^2,3,4

QE3 is open-ended. The Federal Reserve will keep buying mortgage-linked securities for as long as it sees fit, and the Wall Street Journal has reported that the Fed will likely broaden the effort to include the purchase of Treasuries in 2013 (compensating for the absence of Operation Twist next year). So cheap money should be around in 2013 and beyond thanks to the Fed’s bond-buying efforts and its dedication to maintaining historically low interest rates.⁵

Earnings could improve. This last earnings season was as disappointing as analysts believed it would be, but we could see gradual improvement across upcoming quarters, assuming Congress does something significant about the fiscal cliff. Citigroup sees earnings growth of 5% next year even with minor fiscal tightening.⁶

Durable goods orders didn’t drop last month. They were flat in October (minus transportation orders). This implies that if some companies cut back on spending heading toward the fiscal cliff, others increased or resolutely maintained theirs. Business investment increased in October in key categories: 0.9% for computers (the first rise in demand in five months), 2.9% for machinery and 4.1% for electrical gear.⁷

Consumer confidence may be translating into personal spending. This month, the Conference Board’s consumer confidence index reached a mark of 73.7; the highest level since February 2008. Chain-store sales were up 3.3% during Thanksgiving week from the week before, and up 4% from last Thanksgiving week according to the International Council of Shopping Centers.⁷

If we get a fix for the fiscal cliff, 2013 could be promising. There is a real sense that the U.S. economy is headed for better times, along with the market. Morgan Stanley had projected the S&P 500 ending 2012 at 1,167; that certainly seems doubtful. It now forecasts the index finishing 2013 at 1,434. Other year-end 2013 projections for the S&P are even more bullish: Deutsche Bank is seeing a year-end finish of 1,500, Bank of America Merrill Lynch sees the S&P reaching 1,600, and Piper Jaffray thinks it can make it all the way up to 1,700.⁸

There are economists who think 2013 could be a key transitional year, a step toward a more robust economy at mid-decade. If solid economic indicators inspire companies and consumers to spend and invest more, next year might surprise even the most ardent stock market bears.

Citations.

1. www.cbsnews.com/8301-505123_162-57550532/return-of-europe-recession-is-bad-news-for-u.s/ [11/15/12]
2. investorplace.com/2012/11/existing-home-sales-climb-in-october/ [11/19/12]
3. www.latimes.com/business/la-fi-mo-new-home-sales-20121128,0,3039964.story [11/28/12]
4. blogs.wsj.com/economics/2012/11/27/price-rise-shows-a-better-balanced-u-s-housing-market/ [11/27/12]
5. articles.marketwatch.com/2012-11-28/economy/35404923_1_treasurys-operation-twist-program-long-term-rates [11/28/12]
6. www.cnbc.com/id/49922204/2013_Earnings_Outlook_Now_in_Congress_Hands [11/21/12]
7. news.investors.com/economy/112712-634800-fiscal-cliff-fears-dont-sink-durable-goods-confidence.htm [11/27/12]
8. www.cnbc.com/id/49981729 [11/27/12]

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