Money, Meet Mouth: 2013 Trends & Trajectories

February 13, 2013

As the smoke continues to clear on 2012's frantic year-end intrigue, we finally survey the lay of the land. Discerning what may be the trends and trajectories for the year ahead.
You may inquire as to the difference between a trend and a trajectory. Simply put, a trend is a current or developing course, pattern or direction. A trajectory, on the other hand, is the precursor to a trend. All of the variables are there, possibly including the initial launch sequence, yet the trend has yet to take shape.
At any rate, both are variants of the forecasting process. And where 2013 is concerned, following are some of the trends and trajectories we believe might play out.
Equities will provide positive returns... Five years into the equity market's recovery, Wall Street strategists continue their bearish ways. Even as bond prices relent, they continue to recommend the most bearish asset allocation in almost three decades. Further, Main Street refuses to jump into the equity pool.
We've long said that the stock market's primary objective is to disappoint the greatest amount of investors as frequently as possible. This year will be no different.
Domestic equity markets are discounting higher than likely inflation. Q4 earnings continue to come in better than expected. The Fed, and central banks around the world, continue to provide ample liquidity, having all but promised that they will be loathe to quickly raise interest rates until the global economy shows much more promise than it does today.
Commodities and Precious Metals will underperform... With regions like China, the U.S., and Western Europe continuing to contain an enormous amount of excess capacity, the global economy is unlikely to develop the kind of credit creation or supply bottlenecks needed to fan the flames of inflation. Low inflation rates will likely toss a wet blanket atop gold, silver and commodity performance, especially when compared to equities.
U.S. M&A activity will increase dramatically... Amerigroup. Coventry Health Care. Nexen. Dell. Likely just appetizers. With U.S. companies holding massive cash reserves, and many larger concerns seeking a means to fuel future growth, 2013 could be a dealmaker's paradise. If the economy continues its path of improvement, and small- and mid-cap companies remain slightly undervalued relative to large-cap counterparts, then mergers and acquisitions will be a driving force in 2013 markets.
European stocks climb off the mat... Stocks throughout the continent were hammered as the eurozone failed to address an escalating debt crisis. Today, while far from solved, the crisis has cooled. European stocks provide risk-oriented investors with opportunities for growth and income. Eurozone stocks provide tasty dividends and solid growth potential. As global investors cautiously increase their risk orientations, battered-but-attractive euro stocks will be among the beneficiaries.
The re-emergence of the Rust Belt... closing wage disparities, logistical benefits, lower energy and transportation costs and a growing appreciation for relative political stability will continue to bring American companies to repatriate manufacturing facilities. The Rust Belt region continues to offer attractive costs of living, tax incentives and a family orientation. Further, it offers companies a readymade manufacturing infrastructure that's closer to simply flicking an "on" switch than can be found anywhere around the world. Further, the natural gas revolution will also be a source of economic largesse for the Rust Belt, as many of the shale deposits, continuing discoveries, and much of the growing infrastructure, is located throughout the region.
U.S. Large Cap Stocks will outperform... With the Fed's sustained policy of easing and liquidity, a relatively stable inflation rate, and U.S. corporate profits continuing to set the global pace, U.S. companies represent a dynamic means for global investors to ease back into the risk pool. Don't fight the Fed. Ever. And the Fed has all but set a safety net beneath stocks with its continuing monthly bond purchases. With the dollar strengthening (for now), and healthy corporate profits, U.S. stocks will continue to glean attractive comparisons to overseas equities, including those of emerging markets.
Further, bonds and other fixed income investments have backpedaled, with the LQD (investment grade corporate bond index) having lost 1.5% YTD. Some strategists have called for an end to the 20-year bull market in bonds. A continuing retrenchment in fixed income will make equities all the more attractive.
At some point, domestic and foreign investors will simply be unable to tolerate the idea of not participating in the U.S. equity market's continuing appreciation - having largely not done so over the last four years. As those investors re-enter equity markets, and bring massive amounts of sidelined cash, equity momentum will likely shift into a higher gear.
Politicians exit stage left... While the forthcoming sequestration deadline will keep D.C. in the global news arena, the period thereafter should be one of relative calm. Short of a nasty, exogenous geopolitical event, D.C. will be gearing up for the mid-term elections in two years, and focusing on core domestic policy issues. Both of which will make for relatively light headlines, especially when compared to the last two years.
Volatility enters stage right... As hedge funds continue to trail the returns of moderately allocated asset allocation funds, those managers will be forced to chase profits in the second half of the year. Concurrently, Main Street will join Wall Street's long-inaccurate equity strategists and begin to pour capital into stocks. As the water in the pool rises to accommodate all of the new participants, so too will volatility levels. Even with last year's gamut of headlines, volatility levels as measured by the VIX remained low. Contracts going out through October show that lower volatility will remain for the foreseeable future, but let's not fall asleep at the wheel. When the year comes in like a lamb, one should expect to hear a few roars on the back end.
The S&P 500 will finish the year at ___________... Seriously? Year-end market projections are a loser's game. The investing version of a sports betters' over/under. Entertaining, and utterly useless. Besides, for the actively traded portfolio, like our Multi-Asset Global Alpha, the devil will remain in the details. Individual asset classes and positions, and how we tactically over and underweight each.
We believe the year holds promise. Still, complacency kills. Keeps your trailing stops in place. Hedge out the hedgeable. And stick with a proven system.
Jesse Livermore was a renowned turn-of-the-20th century trader with an aptitude for sensing a pattern and following his gut. In 1929, Livermore was worth at least $100 million. Today, that translates to roughly $14 billion, give or take a few bucks.
Livermore was known to say the following: "There is only one side of the market and it is not the bull side or the bear side, but the right side."
At some point this year, Wall Street and Main Street will tire of being on the wrong side of the market. Best hope you beat them to the punch.

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