Bank stocks continue to come back, big time

Financials were the best-performing sector last year, but banks are still widely despised and mistrusted, given their leading role in the credit meltdown. Exhibit No. 1 supporting this: Major banks like Citigroup (C), Morgan Stanley (MS), Goldman Sachs (GS) and JPMorgan Chase (JPM) all trade below book value even though, like 'em or not, they have strong franchises and they are here to stay.

"I think the average person on the street still thinks you're crazy to own financials," says Anton Schutz, who manages the Burnham Financial Industries (BURFX) fund, which has outperformed competing funds substantially over the past five years.

Thus, they still look cheap, especially considering that business should pick up substantially in 2013 as economic growth continues and the capital markets return to normalcy, spurring core banking activities like initial public offerings and mergers and acquisitions, predicts Schutz.

He particularly likes Citigroup and Morgan Stanley because they look so cheap, and also because they will probably resume share buybacks and dividend payouts in 2013. Among smaller regional banks, he likes Regions Financial (RF). It appears to be cheap and also has a lot of exposure to the housing sector via mortgages, so the ongoing rebound there will help.

Banks will also benefit from that overall return of confidence among investors and businesses that Paulsen expects. "The business of finance is all about confidence," he says. "You don't take out a loan without it."

Familiar ghosts will spook the markets

It may seem that the fiscal cliff is behind us, but don't be fooled. There are still plenty of budget problems to work out.

In fact, Fiscal Cliff II lurks just around the corner. The U.S. Treasury can juggle payments to make it through to the end of February without hitting the federal debt ceiling. "At that point the federal government cannot sell any more Treasurys to raise money to fund itself," says Fred Dickson, the chief investment strategist at D.A. Davidson, a brokerage.

You may recall that a standoff on the debt ceiling led to a downgrade of U.S. debt and severe market turbulence in the summer of 2011. "It will be déjà vu all over again," predicts Dickson. "It's going to be a major trigger of market nervousness, probably escalating in mid-January through the end of February."

Even if the debt ceiling gets resolved cleanly, the U.S. could still see another debt downgrade because of the lack of spending cuts in the resolution of the first fiscal cliff, predicts Brian Frank, manager of the Frank Value Investor Fund (FRNKX).

Next, Europe will be back as a market-rattling issue. Greece, Portugal, and Spain will have trouble hitting spending limits tied to rescue loans, Dickson predicts. And their economies won't grow enough to raise tax takes to bail them out. This will jeopardize the flow of additional lending and spark another crisis, probably in the second quarter, Dickson believes. "It is just a bad script," he says. Meanwhile, national elections in Italy in February and Germany in October may bring out the kind of anti-European rhetoric from candidates that can spook the markets, notes Brian Jacobsen, the chief portfolio strategist at Wells Fargo Funds Management.

I think the key takeaway here is that any 5% to 10% U.S. stock market declines that result from various scares will be good buying opportunities. U.S. and European debt problems will ultimately be resolved or kicked down the road again, and the U.S. economic rebound won't be thwarted. So keep some cash on hand to buy pullbacks.

Tensions around Iranian nuclear program heat up

At some point this year, Iran will announce it has enough enriched uranium to produce a nuclear weapon, predicts Byron Wien, a strategist with Blackstone Advisory Partners. Oil markets will get the jitters because of fears of a decisive military response from Israel and the U.S. While the odds of an Israeli strike on Iran are fairly low, at 20%, says Mark Zandi, the chief economist at Moody's Analytics, tensions surrounding all this will send oil prices soaring. Oil might go as high as $115 a barrel for West Texas Intermediate and $120 for Brent Crude, predicts Dickson, the chief investment strategist at D.A. Davidson.

You could buy funds that track the price of crude, like United States Oil (USO) and PowerShares DB Oil (DBO), as a play on an oil spike. But getting the timing right might be difficult.

Instead, it's better to look at this as a reminder to own some energy stocks, either as a trade on a spike or as a long-term hold. Paul Larson, the chief equity strategist at Morningstar, thinks the drilling equipment supplier National Oilwell Varco (NOV) looks cheap, so that's one way to go. He thinks the company will benefit from a rise in natural gas prices in North America over the next few years. Analysts at JPMorgan Chase put Denbury Resources (DNR), Suncor Energy (SU) and Schlumberger at the top of their favorite energy plays for 2013.

Gold spikes to $2,200 an ounce

Ongoing expansion of the money supply by the Fed will continue to create worries about inflation and the financial soundness of the U.S. This will have investors running to gold as a hedge against inflation and overall market risk at some point in 2013, causing the price of the metal to spike.

"We think that so long as U.S. dollar creation exceeds GDP growth, gold prices should increase," says Thomas Winmill of the MidasFund (MIDSX). He thinks gold could trade up to $2,200 an ounce, for a 32% increase from current level of about $1,660. He believes the average price will be $1,950, a 17% increase.

Monetary easing by the European Central Bank will also stoke gold prices by contributing to worries about inflation, says Bank of America Merrill Lynch Global Research investment strategist Michael Hartnett, who has a price target of $2,000 per ounce on gold for 2013.

Spikes in gold would boost gold mutual funds like Winmill's Midas Fund. Gold exchange-traded funds like iShares Gold Trust (IAU) and Market Vectors Gold Miners (GDX), which tracks a basket of gold mining stocks, would also benefit.

A gold price spike would also boost shares of Newmont Mining (NEM), the world's second-largest gold producer and a top holding of Winmill's, which has major mines coming online in Peru and Ghana through 2015. It would also benefit shares of Harmony Gold Mining (HMY), which have been beaten down on fears of nationalization of gold mines in South Africa, where it operates. Those fears are overblown, so Harmony Gold Mining is a buy, says Byron King, the editor of Outstanding Investments.

At the time of publication, Michael Brush owned shares of the following companies or funds mentioned in this article: Philip Morris International. He has recommended Philip Morris International, Citigroup, JPMorgan Chase, National Oilwell Varco and NII in his investment newsletter.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.