By the simplest of measures, it was a good year for stocks.
The S&P 500 rose 12%, extending abull market that began in
March 2009. Yet thebull is showing his age. Sharp gains were offset
by mini-slumps, and themarket had to grind it out just to finish in
theblack . On a more granular level, 2012 played out by a different
set of rules than preceding years and investors need to heed to
shifting winds as they prep for 2013. Here are four key themes that
emerged in 2012, and a look at what we might see in 2013.
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1.
Risk-on and risk-off is all that matters these days |
| Throughout 2012, market strategists focused onissues such
as valuations, sales andprofit growth andbalance sheet
actions such as dividends and buybacks. None of that
mattered. Instead, all you needed to focus upon was the
current level of certainty or uncertainty. Investors were
running scared in the spring when the headlines out of
Washington, Europe and China were daunting, but in quieter
times, many were in a buying mood. Indeed, a look at the
monthly gains in the S&P 500 tightly correlates with the
relative fear among investors as they pivoted between
embracing risk and fleeing from it.
More recently, investors have been torn between the twin
poles of fear (thanks to Washington's fumbling) and optimism
(thanks to signs that the consumer end of the U.S.economy may
be rumbling back to life). As a result, the S&P 500 is on
track to finish just above 1,400 for the third straight
month.
S&P 500 gains during first and thirdquarters ,
offset by losses in second and fourth quarters
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2.
China still rules the commodities market |
Fears of a slowing economy in China kept a lid on commodities
after robust gains in the prior few years. Crude oil fell
about $10 a barrel, while copper, aluminum, iron ore, steel
and other metals remained mired in a slump that began in the
second half of 2011.
Yet signs are emerging that China's economic slowdown has
already ended, thanks in large part to an under-discussed
stimulus program that resumed China's heady pace of
construction. Of course, the most importantcatalyst for China
is the health of its trading partners in Europe, North
America and elsewhere, so the commodities picture in 2013will
also be affected by the global economy. Still, it's a fairly
safe bet that if China continues to grow at a solid pace in
2013, commodities are likely to rebound nicely in 2013.
An upturn in new home construction in the United States
would also be a clear positive for commodities.
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3.
Lots ofcash does not equal lots of deals |
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The amount of cash parked on balance sheets of S&P 500
firms continues to swell. More than $1.5 trillion is just
sitting there, waiting to go to work. That's why many
expected to see a boom in mergers andacquisition (M&A)
activity in 2012. Yet outside of the energy sector,
deal-making was surprisingly dormant.
Conventional wisdom holds that in a slow economy, strong
companies like to make acquisitions in order to sustain the
growth rates that push stock prices ever-higher. After all,
many executives' compensation packages are tied to rising
stock prices, and growth-through-acquisition strategies have
enriched many executives in the past.
So why has deal-making remained weak? Some blame the
disconnect between buyers, who think a still-weak economy
shouldmean low purchase prices, and sellers, who think their
businesses will be alot more robust in a few years and want a
full price.
But perhaps the real reason is the economy itself. If you
make a big purchase, and the economy stumbles, then you now
have two messes to clean up (your own business and the one
you acquired). However, if the U.S. economy moves on to
firmer footing in 2013 and the macro backdrop for acquisition
integration looks more appealing, then all that pent-up cash
may finally beput to use.
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4.
Thebond market starts to turn |
Perhaps the greatest boost for stocks in 2013 will come from
the massive sums ofmoney expected to flow out of the bond
market. For much of the past five years, investors have
sought the safe haven ofbonds , but since interest rates
can't really go much lower, bond investors are starting to
rethink that proposition. To be sure, the bond market has
been rallying since well before the GreatRecession of 2008,
thanks to steady drop in interest rates that began several
decades ago. Looking at this 10-year chart of the
iShares Barclays 20+ yearTreasury Bond fund (NYSE:
TLT
)
, you'd think a bond rally remains intact.
Yet in the past seven months, this fund has moved sideways. A
sideways market -- after a stunning bull run -- often signals
a slow churn in an investor base from buyers to sellers, and
if the U.S. economy is just a bit stronger in 2013, then bond
sellers may start to predominate. |
Action to Take -->
You made money in the market in 2012 if you followed one simple
rule: Use rallies as an excuse to sell and use pullbacks as a time
to get aggressive. Indeed, multi-month holding periods appear to be
the way to score -- and lock in -- gains these days, and that's
likely to still be the case in 2013. For example, the market is
weakening now as the Fiscal Cliff talks stumble, which is creating
fresh entry points as stock drift lower. However, many expect that
the resolution to these talks will trigger a solid rally. After
all, investors have proven their ardor for stocks whenever
uncertainty is removed.
Such a rally may prove to be a time to take profits anew,
because as
I noted a few weeks ago
any Fiscal Cliff deal is likely to be a half-measure. As a result,
investors may start to revisit their concerns about the
still-expanding level of federal debt in ensuing months, especially
if bond yields start toback up .
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.