The Edmond Sun

February 1, 2013

THE ASTUTE INVESTOR: Forecast for 2013 is up, down, sideways

Nick Massey
Special to The Sun

EDMOND — An old bit of advice says, “Never eat at a place called Mom’s or play poker with a man named Doc.” I’ve also been told that if you’re sitting at the poker table and haven’t figured out who the sucker is in the first 30 minutes, it’s you. That’s a joke, but this isn’t: When a cyclical bull market is getting long in the tooth, be careful not to stay too long at the party. This is even more so if you’re late to the party.

This year will be full of surprises and perhaps even more challenging than 2012.  This bull market is getting pretty old and nothing goes straight up forever. In the last 110 years, except for the unusual decades of the 1920s and 1990s, a bear market has come along an average of every 4.4 years. The last one began December 2007 — five years ago. You know this thing is headed south at some point. You just don’t know when.

All indications are the next slowdown for the economy and market likely will take place in 2013 or 2014. The improved economy and the size of the government debt load makes it unlikely the imposition of austerity measures and reversal of the Fed’s easy money policies can be delayed much longer. The current long-term bear market, which began in 2000, probably has four to five years remaining. Within that period, there should be one more recession and cyclical bear market. The catalyst being austerity measures to fight the “macro” problem of record government debt. However, I don’t expect the next cyclical bear market to be as severe as the last one in 2008.

That doesn’t mean there won’t be great opportunities in 2013, but you need to be much more tactical in what you do with your investments. If you are a good trader, 2013 might be a lot of fun. If you’re not, you’ll get whipsawed. With GDP growing at a feeble 2 percent in 2013, and corporate earnings topping out at $105 a share on the S&P 500, those with a traditional “buy and hold” approach to the stock market will do all right provided they are willing to sleep through some gut-churning volatility. A little motion sickness medication might be helpful.

Here is my forecast for 2013:

1. Stocks will finish higher in 2013, but there will be hard work along the way as a classic “sell in May and go away” pattern happens for the fifth year in a row. We start with a ferocious rally that takes us up to the all-time highs or slightly higher, then a heart stopping summer selloff, followed by an aggressive year-end rally. I would guess we go up 10 percent, then down 20 percent, then up 25 percent to give us an up 10 percent year.

Investors will be slow to comprehend the impact of all of these events and will not get fully invested until March or April — just in time to get hosed again. “Won’t you come into my parlor?’ said the spider to the fly. By then, the S&P 500 will be at 1,600, the top of a 14-year range, where it always fails in a 2 percent growth economy. Get ready to fail again.

2. The next leg of the European sovereign debt crisis comes back in the summer triggering the summer downturn. It will be triggered by Spain, but the contagion spreads to Italy and France. This creates a hiccup in China, so the recovery slows there. A nasty, public slugfest in Congress over the debt ceiling will further give stock owners ulcers. This triggers recession fears (which won’t happen in 2013) and cuts the legs out from under the market. The way is then cleared for a 20 percent swoon down to 1,300 on the S&P 500.

3. Bargain prices in the fall will give us a nice springboard to rally into the end of the year as the Federal Reserve will use any substantial weakness in the market to launch another quantitative easing program. (Somebody please stop the madness!)  The European Central Bank can do the same and come up with an LTRO at any time. Japan’s new, more aggressive monetary easing and epic public spending should be reaching its stride by then. China seems to always have another $500 billion stimulus budget that they can pull off the shelf at any time.

4. The Treasury bond market has finally peaked but is not ready to pop the bubble yet. That day is coming but not this year. Bond yields will just move to a higher trading range. The range for the 10-year Treasury bond yield was 1.40 percent to 1.90 percent in 2012. We probably move in a new range of 1.90 percent to 2.50 percent, but not much higher than that.

5. The U.S. government runs another $1 trillion deficit for the sixth year in a row.

6. Gold is not dead; it is just resting. The Fed’s QE3 is entirely focused on the housing market through the purchase of mortgage-backed securities, so the effect on the broader money supply is delayed. However, I expect the effect to start kicking in sometime in 2013 bringing a new high for gold with it. Until then, the pain trade for gold holders is on.

7. For the economy, the second lost decade continues. I am sticking with a 2 percent GDP growth forecast for 2013, but mostly because of the momentum left over from the fourth quarter of 2012.

8. Forget about employment. The news will always be bad. At this stage of the economic cycle, we should be generating a robust 400,000 jobs a month, not a paltry 150,000. I believe that the U.S. has entered a period of long-term structural unemployment. Yes, we may grind down to 7 percent, but no lower than that.

So there you have it. We’ll check back next January and see how I did. I’m reminded of these words from “Les Miserables,” which seem appropriate now.  “There was a time when men were kind, when their voices were soft and their words inviting. There was a time when love was blind and the world was a song and the song was exciting. There was a time. Then it all went wrong.” Stay tuned for updates in what will be an important year. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at Securities offered through Securities Service Network Inc., member FINRA/SIPC.