Taking Stock Heading Into 2013
The second half of December tends to generate a fair amount of reflection on the events of the previous 12 months. That is true for investors as well and often gives rise to a number of questions about the market. Did the economy grow as fast as was expected? Did job growth measure up to economists’ forecasts? Will those industries that have been a drag on the economy in 2011, such as housing, start to turn the corner? Did the politicians in Washington come together and tackle the big issues that the country and the economy face? And so on.
This time last year, investors were starting to receive early warning signs about fiscal problems in Europe, while on the home front the jobs picture appeared to be improving. Flash-forward to today and it’s as if we were in an episode of “Lost” and we see that despite roughly 2 percent growth in gross domestic product for all of 2012 and close to 2.4 million Americans falling out of the labor force, all of the major stock market indexes are up between 9 percent and 17.5 percent year to date.
Looking at Mr. Stock Market over the past year, one would think that all was right with the world given domestic returns, which are well ahead of historical averages. According to the Credit Suisse Global Investment Yearbook, stock markets in the developed world delivered an annualized return of 8.5 percent over the past 11/2 years. As I put on my analyst hat, the question that springs to mind is whether there is more room to go up in the overall stock market in 2013.
Complicating that analysis is the continuing pingpong match over resolving the so-called “fiscal cliff.” As it stands, the two political parties have moved closer to a deal, but as I have said before, the devil is in the details. Until then, companies will continue to hope for the best but plan for the worst in the near term, which will mean modest progress — at best — in job creation and business investment in the coming months. No wonder the National Federation of Independent Business’ Small Business Optimism Index plunged 5.6 points in November to 87.5, the lowest reading since April 2009.
The National Association of Business Economics recently presented its outlook for 2013. The consensus of 48 macroeconomic forecasts calls for an annual average growth rate for real of GDP of 2.1 percent, compared with 2.2 percent in 2012. Sifting through the details of that forecast, we see the consensus view is for the economy to improve throughout 2013, with GDP growth reaching 3 percent in the fourth quarter. Breaking that down with some simple math, the first half of 2013 is poised to be far weaker than the second half.
That level of economic activity, coupled with prospects for either direct or indirect higher tax rates in 2013, is unlikely to accelerate domestic job creation to the point where it reaches escape velocity from the so-so 150,000-jobs-per-month average of 2012. At least for the near term, we will be in for more of the same — disposable income under pressure, high unemployment and underemployment, and ample slack in the manufacturing economy.
As we turn to the stock market, Wall Street analyst consensus expectations call for S&P 500 operating earnings to grow 6.5 percent year over year to $108.06 in 2013, according to Thomson One data. Keep in mind, those same earnings are tracking to grow only 3.6 percent this year compared with 2011.
How do we reconcile that rosy number given the NABE’s essentially flat GDP forecast for 2013?
Part of it could be that those consensus earnings expectations for the S&P 500 have yet to be updated, as those figures are unchanged over the past 30 days. Another contributor could be the improving economic landscape in the emerging markets, a category that for some reason tends to include China even though it is the world’s second-largest economy.
That is probably why the shares of two exchange-traded funds — iShares FTSE/Xinhua China 25 Index (FXI) and iShares MSCI Emerging Markets Index (EEM) — have outperformed the top three U.S. stock market indexes over the past month. That is a good reminder that even though challenges remain in the domestic economy, there is always a bull market out there somewhere.
• Chris Versace is the editor of the PowerTrend Profits newsletter and ETF PowerTrader, as well as the host of PowerTalk. Visit them at ChrisVersace.com or follow him on Twitter at @ChrisVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.