With the New Year just around the corner I figured it apropos to proffer the idea of discussing personal points of view and 'expert' opinions regarding the relative performance of various asset classes, markets, and sectors in the investment universe.
I happened to catch a video presentation where I gleened one 2013 outlook in particular which going from memory I'll paraphrase below:
Regarding the economy there are some positives including rising manufacturing new orders, improving home sales resulting in stabilization or even rising prices, and continued uptick in automobile sales which are a critical component of the manufacturing industry. Negatives include the spectre of higher taxation and increased regulation (both of which are a drag on economic capacity regardless of your political stance), reduced marginal effectiveness of additional rounds of QE, and a stronger dollar is leading to reduced exports.
A few items of note, in the modern era nearly 60% of post-election years are graced by recession. Higher taxes results in less disposable income in an economy where 70% of GDP is derived from consumer spending. Increased regulatory burden/compliance spending by businesses to comply with Obamacare. The CEI estimates regulation compliance costs the US $1.8 trillion annually, up $215 million in 2012. The average car in the US is 11 years old which combined with low interest rates could spur auto sales and foot traffic of prospective home buyers is rising and at levels associated with rising home prices.
The question then becomes how can we capitalize on this information. With respect to domestic stocks there are a few positives. The flood of liquidity via QE ad infinitum will likely keep a near-term floor under the market preventing a 2008/2009 style crash. Lower energy prices increases disposable income at both the consumer and business level. Low interest rates should stimulate borrowing which benefits banks, credit cards, and other finance firms. Some negatives are that stocks are not cheap and defense stocks will likely see cutbacks in government expenditures. Taxes on the investor class are likely to increase lowering the valuation of equities. And corporate earnings are outpacing corporate revenues which is not likely sustainable.
Domestic firms are likely to face a challenging 2013 due to reduced government expenditures at home and overseas. Trade partners such as Japan, the Eurozone, and increasingly even China are facing debt burdens which will inhibit their spending power resulting in less US exports. This is aside from the fact the debt level in the United States is growing to heights where it will eventually become problematic.
As for fixed-income, nearly anything negative for equities is positive for bonds. Any signs of a foreign debt crisis will result in flight-to-quality money flows to US Treasurys. Municipal bonds may benefit from higher taxes if the tax exemption is left untampered (Barack has proposed capping the tax exemption for high earners which would lower the appeal of this asset class). Negatives include the growing debt may eventually lead to loss of investor confidence. At some point QE may have its desired effect of higher inflation which could result in higher rates (lower prices) assuming the Fed loses control of their strategic aim of financial repression.
Keep an eye on home prices. Real estate is often a respectable gauge of inflationary forces. Bonds traditonally lag when home prices rise. Bond prices fell (and rates rose) during QE1 and QE2. Watch for further massive liquidity injections both home and abroad that may result in unintended consequences in the bond markets. A distinction should be made between high grade debt and high yield (aka: junk bonds). Junk bonds typically track the equity market whereas high quality debt will often trade inverse the equity markets.
International markets are showing positives including continued strength in Turkey and Poland the latter being fueled by a pro-business treasury ministry. China's new leadership is quelching investor fears of slowing growth leading to increased bets of a rebound in the Far East. European markets are rebounding after the ECB actions have largely been discounted by investors and growth is emerging as a strategy as opposed to austerity measures of the past. The natural resource rich economies of Africa including S. Africa, Egypt, and Nigeria are showing signs of sustainable growth. Mexico's favorable proximity to the United States and rising labor costs in Asia are resulting in an economic renassaince with many Western firms establishing operations inside Mexico. Negatives still abound including the Eurozone situation being unresolved, a potential end to the 10-year commodity boom though some commodities will invariably outperform the asset class, socialist policies in France will drive wealth and business abroad, leadership change in Japan and unfavorable demographics could weigh on the Nikkei, and fears of a middle-income trap in China still linger (though this benefits Latin American countries such as Mexico) and Russia will go the way of energy prices as oil and gas are the country's only true exports which are being exported to a slow-growth Eurozone.
European growth is dubious due to lack of investment and this may drag down Russia. Lower energy prices benefit commodity importing countries such as Poland and Turkey. Singapore should see a favorable climate due to increasing regulations in Western economies while the Philippines should benefit from favorable demographics, loose monetary policy, and English speaking peoples sustaining probability of continued American outsourcing. South Korea is likely to continue to inovate and copycat and find markets for its low-cost products.
Summing it up: Look for lower energy costs to help manufacturers and consumers or raw energy commodities (refiners and fertilizer and chemical manufacturers). Anticipate sub-par returns in domestic equitiy indices in post-election year. Increased regulation favors international and emerging market investing. Increased taxes favors tax-prep firms like HRB. In environment of increased volatility and investor worry high grade bonds are preferred over junk bonds. Housing and autos look to continue their rebound and low borrowing costs favor banks and other lending institutions.