With a New Year, Time for a Market Outlook

Market Outlook 2013 - Pali Lookout

Generally speaking, market outlooks are a dangerous proposition because there is a high likelihood of being wrong; nonetheless, I give you my 2013 Outlook.

Going into 2013 I find myself in an uncharacteristically optimistic mood for a number of reasons.

First, central banks the world over continue unprecedented measures to stimulate the economy. This means that liquidity is extremely high.

Second, various economic issues have retail investors very nervous. Such issues include the fiscal cliff, a sluggish economy, persistently high unemployment, large government debts and deficits, and a weak housing market. While these issues are large, they will most likely be navigated just as issues have been for the better part of this country’s existence. This means that many investors remain under-invested due to fear and the fact that stocks remain somewhat inexpensive.

On an absolute basis (PE ratio), the stock market is slightly below its long-term average, and if one uses the Shiller PE 10, the market is slightly above its long-term average. But, if you consider stocks relative to other asset classes, such as bonds with all-time-low yields and real estate with low cap rates and interest-rate sensitivity, stocks appear to be the best in show with dividend yields on the S&P 500 rivaling that of 30-year treasuries.

Third, our firm’s recession-forecast model estimates a meager 1.7 percent chance of a recession starting in the next 12-18 months. This is one of the lowest readings of the last decade, and I believe most people feel it is higher even though they lack empirical evidence.

So what does all this mean?

I believe the mix of elements listed above could make for a large surprise to the upside for investors.

Think about it for a minute. You have a market where there is a large degree of pessimism and the feeling that the economy is way worse than it is, coupled with stocks being priced poorly compared to other assets. If sentiment begins to turn and investors start pricing in lower odds of a recession, you may see a major move to the upside.

In fact, if everyone felt really good about the economy and was excited about stocks, they would probably be expensive and the only surprise left would be to the downside (think 1999-2002).

This is not to say that investors should throw caution to the wind.

I am a big proponent of controlling risk. In fact, our research shows that investors perpetually take too much risk.

What I am saying is that stocks provide an excellent long-term way to grow wealth and I believe might be somewhat undervalued; it may be a good time to cautiously add to positions in the equities market. Of course, everyone has a different risk tolerance, and we live in a world where risk abounds.

So, setting up a customized plan should be the focus for every investor.

For me, 2013 brings me back to an old quote from Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.”

 

[Photo: Flickr/StevenDavis]