1/8/2013 7:15 PM ET|
The 7 big developments of 2013
From the debt ceiling to Iran to $2,200 gold, here are what are likely to be the key market-moving events of the coming year and how to play them.
With the fiscal cliff behind us and Europe under control, it's smooth sailing ahead for stocks -- right?
Well, not quite. Plenty of bugaboos and old ghosts will come back to haunt the market and spark major sell-offs in 2013 -- including tensions over Iran's nuclear program, eurozone debt problems and, yes, Fiscal Cliff II, the remix.
Other major events and trends I foresee for 2013: Emerging markets will outperform, gold will spike to $2,200 an ounce, companies will finally start spending their cash, bank stocks will outperform (surprising just about everyone), and the U.S. may lift its trade embargo against Cuba.
And 5% to 10% pullbacks caused by these events -- we'll likely see this level of damage in the first half of the year, maybe more than once -- will be buying opportunities. That's because the economy will stay on track, finally restoring the confidence of businesses and investors. That will leave stocks 10% to 15% higher by year's end. So keep some powder dry.
Here's a closer look at the major events and trends of 2013 -- and how to play them.
Stocks advance and win over investors
It may be hard to square with what you hear -- that steady drumbeat of scare stories about Europe, the fiscal cliff, the debt ceiling and other economic woes -- but we're actually four years into a huge bull market. Because of all those bugaboos, much of the public remains skeptical. This will change, and investors will adopt a more bullish stance in 2013, pushing stocks higher even as the economy posts merely lukewarm 2% to 3% growth.
"A slow but steady rise in confidence will likely drive the Standard & Poor's 500 Index ($INX) above its previous all-time high of 1,565, and perhaps even as high as 1,700," predicts James Paulsen, a market strategist and economist with Wells Capital Management. "The turbulent political environment that curtailed corporate risk-taking in 2012 will end," agrees David Kostin, the chief U.S. equity strategist at Goldman Sachs.
History supports a positive take on stocks for 2013. That's because bull markets that survive four years typically go on for a fifth, says Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase. Of the 12 bull markets since 1935, eight have lasted for at least four years, and of those, five continued on into a fifth year.
How to play this? As confidence returns, investors will get out of "safe haven" stocks in utilities, consumer staples and telecom services. So, it's best to avoid these areas. Another reason to stay away: These groups look overvalued now because so many people have run to them for safety, says Kostin.
In contrast, investors will move into the more economically sensitive or "cyclical" kinds of companies they've been avoiding because of all the economic fears.
Thus, it makes sense to buy stocks in these sectors now, ahead of the move into these stocks by other investors, says Lee. Once again, history supports this. Cyclical stocks -- in areas such as basic materials, industry, technology and consumer discretionary goods and services -- typically outperform in the fifth year of a bull market.
Top picks of JPMorgan Chase analysts in these areas include: Goldcorp (GG) and Carpenter Technology (CRS) in metals; MeadWestvaco (MWV) in paper products; LyondellBasell Industries (LYB) in specialty chemicals, Robert Half International (RHI) in human resources; Quanta Services (PWR) in construction and engineering; Canadian Pacific Railway (CP), Texas Roadhouse (TXRH) and Brinker International (EAT) in restaurants; PulteGroup (PHM) in homebuilding; Target (TGT) and Urban Outfitters (URBN) in retail; Harley-Davidson (HOG) in recreational vehicles; Wyndham Worldwide (WYN) in hotels; and Oracle (ORCL), Texas Instruments (TXN) and Cree (CREE) in technology.
Companies finally unleash their cash
That return of confidence will have U.S. companies making use of their huge cash hoards, in a capital spending spree that will have them upgrading plants, equipment and software.
Companies will also be pressed to raise their spending for another reason, predicts James Swanson, the chief investment strategist at MFS Investment Management. Capital spending has been stuck at abnormally low levels, he says. In fact, it is around 6% of sales, which is toward the low end of the 5.1% to 8.1% range of the past 16 years, according to analysts at JPMorgan Chase.
This helps explain why industrial capacity usage in the U.S. currently stands at 78% -- a red-flag zone. Economists consider 80% to be full capacity -- the point at which companies are pressured to start expanding to avoid bottlenecks. "At the current economic growth rate, we will be at 80% next year," says Swanson. "Companies have been waiting and waiting. At some point they will have to freshen up."
He thinks that will happen this year. The potential here is huge, because nonbank companies in the S&P 500 hold about $1.2 trillion in cash.
A capital spending spree will be good for companies that sell the tools, motors, valves, switches and other equipment used in plants and factories, like Emerson Electric (EMR), Illinois Tool Works (ITW) and Danaher (DHR). But it will also help tech companies, since businesses will want to spend on tech to maintain efficiency and profit margins. "The installed software base is the lowest ever," says Swanson. Thus, an upturn in capital spending should boost sales at companies selling business-related software and storage, such as Microsoft (MSFT), VMware (VMW), EMC (EMC) and Oracle. (Microsoft publishes MSN Money.)
Emerging markets outperform
Investors have shunned emerging-market stocks on worries about a slowdown in China and elsewhere. Thus, developing-market stocks trailed U.S. stocks in 2012.
But that will change. The reason: In an effort to spur growth, emerging-market central banks have been cutting interest rates and easing monetary policy for six months. The effects of such moves usually take eight to nine months to kick in. So, by the second quarter, we should start seeing faster emerging-market growth, says Swanson.
Another factor that will boost growth is increased spending by the expanding middle classes in emerging-market economies. "The growth will be stronger than what the market has priced in," predicts Swanson.
"Emerging-market stocks will likely provide the best returns in 2013," agrees Paulsen. "These economies still offer the fastest growth available in the world."
Market strategists at Goldman Sachs, who agree with this take, suggest owning U.S. companies with lots of exposure to these regions. Their list includes Agilent Technologies (A) in diagnostic and measurement equipment; Noble (NE) and Schlumberger (SLB) in energy equipment and services; NII (NIHD) in mobile phones; Nike (NKE) in apparel; Texas Instruments and Emerson in technology; Wynn Resorts (WYNN) in casinos; cigarette giant Philip Morris International (PM); Maxim Integrated Products (MXIM) in semiconductors; and Yum Brands (YUM), which has a big presence in China with its KFC chain.
VIDEO ON MSN MONEY
Same range and the same "churn"..it hass been this way for more than a couple years, now. the "pundits" and wall street and the "bankers" are entirely crooks. The government is just a BS mechanism that must give the money to those that do not need it. Welfare is going up and up...and, this will not change. Our "system" is entirely broken top to bottom.....feeders. Regulate the "crooks" in our culture, first. What a total mess!
Life is a lot like Golf, what you think you need to do to fix a problem, is exactly what you should not do. What people want done is usually the wrong solution.
What does the Middle Class want? Raise their employers taxes, cut spending for the poor, do not touch my Medicare, cut Medicaid, protect the environment at the expense of others, and government subsidized mortgages.
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