S&P’s Stovall: Pleasing Market Tally for 2012, Warning for 2013

‘Renewed investment agita’ at end of first quarter should result in buying opportunities

Substantial gains across asset classes in 2012 confirmed the old adage about the market ascending a wall of worry, as investor anxieties over the presidential election and a year-end fiscal cliffhanger did not prevent share prices from rising quite sharply.

In its first equity research report of the new year, S&P Capital IQ tallied market performance for 2012, while also offering a warning about 2013 based on current events.

Sam StovallThe high double-digits was the main range for asset prices last year, according to Sam Stovall (left), S&P’s chief equity strategist and author of the research report. S&P’s main 500 index of large-cap stocks returned 16%, its mid-cap index, 17.9%, and its small-cap index, 16.3%, in 2012.

Foreign markets did even better, with the benchmark MSCI-EAFE index, which tracks developed overseas markets, returning 17.9% and MSCI’s emerging markets index returning 18.6%.

The strongest asset class, though, was real estate investment trusts, with the NAREIT equity-only index rewarding investors with a 19.7% return.

Notably, all six of these key benchmarks significantly outpaced their average historical return since 1977.

Just two principal asset classes lagged their 35-year averages, but even they were in positive territory. The S&P GSCI, a commodities index, returned a measly 0.1% and Barclay’s Aggregate bond index was up 4.5%, a tepid performance in a bond bull market that has lasted decades.

Within the S&P 500 stock index itself, Stovall reports that all 10 of its sectors were in the black in 2012, with financials and consumer discretionary sectors leading the pack, up 28.8% and 23.9%, respectively; the broad index was weighed down by utilities and energy, up just 1.3% and 4.6%, respectively.

Sliced more finely still, of the 134 sub-industries S&P covers, the real estate recovery lifted household appliances (114.4%) and homebuilding (102.8%) stocks the most. The biggest laggards were education services (-60.2%) and computer and electronics retail (-32%).

Based on market averages, a normal year would see stocks deliver strong first and fourth quarter performance, struggling in the middle of the year and delivering a year-end gain in the mid- to upper single digits.

However, writes Stovall: “As we enter 2013, we already know that this will be anything but a normal year.” The S&P analyst notes particularly that while Washington came to agreement on tax policy in a last-minute fiscal cliff deal, U.S. leaders postponed the most difficult part of the negotiations concerning spending cuts to the end of the first quarter.

The significance of this for investors may be “renewed investment agita” in the coming months, and consequent market entry opportunities as our politicians “go after each other all over again,” Stovall says.

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