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November 21, 2012 at 07:00 PM
The afternoon knows what the morning never expected, cautions a Swedish proverb. When it comes to the economy and securities markets in 2013, smart advisors will try to anticipate what could be rude surprises to the unaware.
In this difficult economy and volatile market, that of course is not terribly easy. To help, our distinguished Research Roundtable panel has served up its best analytic thinking and lots of food for thought to forecast how critical situations could shape up next year.
Not that there’s much agreement among the five panelists. But there is one certainty for 2013: uncertainty.
In mid-October, the experts held forth on the presidential election, the fiscal cliff, quantitative easing, economic turmoil in Europe and China’s slowing economy, among other concerns.
Portfolio-wise, mega-cap stocks and the emerging markets sector are forecast to fare well; bonds—still stuck in a deep-freeze—not so much.
The byword for the coming year? In a nutshell, it’s caution.
Here is what our panelists were predicting a few weeks before Election Day. The panelists are:
John Buckingham (Aliso Viejo, Calif.) Chief investment officer, Al Frank Asset Management, managing about $500 million in assets. Editor, The Prudent Speculator newsletter. Manager, the $85 million Al Frank Fund, with an annualized 10-year return of 10.83% through Sept. 30, 2012.
Kenneth L. Fisher (Woodside, Calif.) Chair-CEO, Fisher Investments, which manages $44 billion in assets. Forbes “Portfolio Strategy” columnist for 28 years. New book: Your 15-Minute Retirement Plan: How to Avoid Running Out of Money When You Need It (Wiley, Nov. 2012).
Nicole Gelinas (New York City) Chartered financial analyst (CFA) charterholder. Senior Fellow, The Manhattan Institute. Contributing editor, The Manhattan Institute’s [start ital.] City Journal [end ital.]. Author, After the Fall: Saving Capitalism from Wall Street—and Washington (Encounter Books, 2009).
Jeffrey Gundlach (Los Angeles) CEO-CIO, DoubleLine Capital, managing $48 billion in assets. The flagship Total Return Bond Fund’s annualized total return since its April 2010 inception through Sept. 28, 2012, was 13.94%.
Robert Rodriguez (Los Angeles) CEO-managing partner, First Pacific Advisors and advisor to FPA Capital and FPA New Income funds. Firm manages assets of $21 billion. FPA Capital’s compounded rate of return from July 1984 through Sept. 30, 2012, was 14.6%. FPA New Income hasn’t had a down year in 34.
What’s the current state of the economy?
Fisher: In a relatively slow expansion that’s less than people want.
Gundlach: Being propped up by government programs that get taken away.
Rodriguez: Languid and deteriorating. Everything that was bad in late 2009 is worse today. I hope that in 2013, we take some hard, stiff medicine to fight this lethal disease. We have manipulation in the capital markets by the Federal Reserve. I call it a form of price-fixing.
Buckingham: We’re better off than most thought we’d be even though the overall rate of economic growth is still very much subpar.
Gelinas: Tenuous. On the good side, the housing market in a lot of the country has probably finally hit bottom. That’s why you see a little improvement in consumer spending.
What’s the state of the stock market right now?
Rodriguez: Delusional. Fundamentals are weakening. Market prices have been inflated.
Buckingham: We’ve had a tremendous rally in the last year, yet investors are scared.
Fisher: Doing just fine because the market has had an okay year.
Gelinas: We don’t really know what asset values should be worth because they’re being distorted by monetary policy. It encourages a herd mentality.
Gundlach: The Fed announced that their interest rate policy will be rigid for years to come. This leads to increased risk-taking: People think there’s no interest rate risk and none ongoing.
What’s your outlook for the economy next year?
Buckingham: The overriding theme is uncertainty, and uncertainty is generally the enemy of the stock market investor. Much depends on whether we resolve the fiscal cliff. Falling off the cliff would likely trigger a short-lived recession.
Gundlach: The only two questions that matter are the U.S. deficit and the peripheral countries in Europe. The risk lies with the fiscal cliff. We have a situation where, clearly, taxes must be raised or government must be cut.
Fisher: We have the infinite productivity pill: We’ve evolved into a world that can produce more and more out of less and less. I’m not sure that we can create jobs the way we once did. [But] we won’t have a recession.
Rodriguez: Weak in the first half; real GDP growth will average not much more than 2%, and recovery in employment won’t occur to any appreciable extent…. As I’ve said before, if we don’t address the federal deficit and expenditures by restructuring in 2013, we will face a fiscal crisis equal to or greater than the one we just went through.
Next year is the most critical fiscal year of the last 80. If there are sizable reductions and restructuring, it will probably hurt the economy in the near term—but be better for it longer term.
Gelinas: More of the same slow-but-real recovery, as home prices continue to increase a little. We’ll see jobs added but no superstar numbers. As for the fiscal cliff, whatever they’ll do will be enough to avoid huge tax increases across the board all at once and massive cuts in discretionary spending. They’ll probably move it off into the future again. They’re borrowing money from future wealthy taxpayers at a pretty low rate.
Other thoughts about the housing market?
Gelinas: The biggest problem is: What’s going to happen when interest rates eventually go up? They’ll keep them low till 2015, but that will come [soon enough]. When are we going to start to worry about that, and what will it mean for the housing market—and for banks, for securities?
Gundlach: The housing market is likely to disappoint next year. The improvement that people have seen is somewhat artificial due to a mix shift. The high-end market, though, is legitimately strong; I expect it will outperform again in 2013.
What’s your outlook for the stock market next year?
Fisher: It’s very hard to find a bear market in recessions that start from a yield curve as steep as the one we have, which is relatively steep. But people will still be looking over their shoulder. It’s like the boy that cries wolf: If nothing terrible happens, everyone eventually just gets tired of it. As John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We haven’t passed the skepticism phase yet; so we’ve got some time to run.
Rodriguez: If a grand bargain [fiscal agreement] is achieved, the markets will rally but on second thought, view it negatively.
Buckingham: Investors are positioned on the safe end of the spectrum. Returns will be more in line with the historical average of 9% to 11%, which is sensational in this environment.
Gundlach: The recipe for success for stocks and bonds is to expect more of the same but put on a low-cost hedge for very high volatility. The big danger is that markets are playing a “Beat the Clock” game—investing today based upon hoping for buoyancy in markets because of manipulation.
The reality is that some event is quite probable in the next year that will lead to a recession. So it’s better to stay on the sidelines largely in investments to get clarity on the way in which the recession or action toward money-printing starts to affect markets.
Do you expect inflation?
Fisher: You don’t have inflationary pressure unless you create money; and, in theory, money is created only when banks make loans. As the Fed buys bonds with QE2, QE3—QE 97!—it’s flattening the yield curve. That’s stupid to do because it makes banks less eager to lend. We’ve turned banks into something that’s neither fish nor fowl.
So, then, what do you see happening in bonds?
Fisher: In a world where people fear inflation but inflation isn’t there and the Fed is basically acting in deflationary ways, you’ve got not a lot of reason for bonds to move.
Rodriguez: The bond market, in very highfalutin terms, sucks! There are more ways to lose money in bonds today than to win. [But] the odds are greater than 50%-50% that interest rates both at the short and the long ends will be higher assuming that we have a different Fed chairman.
Gundlach: It will be difficult getting bond yields to rise in the U.S. based on traditional factors like inflation due to economic growth. As long as there is the wherewithal to manipulate the markets, the frozen picture that we’ve seen in bonds will continue.
