Forza Investment Advisory - 2013 Investment Outlook

You've probably heard of the stock market saying, "As goes January, so goes the year."  Well, there is also a shorter version of this that has had remarkable success in predicting the market. The Dow passed its first test of the New Year by rising on the first day of the year and showing a gain after the first five trading days of the year. Based on the last 50 years history, 85% of the time the Dow has shown a gain by year-end if it is up after the first five days. Also it tends to rise the rest of January. On average, the annual gain is 8% with a 10% median when the market passes the test. Of course it is generally not a straight line and history is not a predictor of the future, but this is a good positive "vibe" at least to start the year.   

I just sent out my annual investment letter to clients so I thought I'd reprint it here. So the following are my comments on the year just ended and an outlook for 2013. 

Forza Investment Advisory Year-end 2012 Investment Letter

2012 was an interesting year to say the least. 2013 is off to a good start with the Fiscal Cliff deal partially out of the way and company earnings reports about to take over. The fourth quarter and the year ended with a bang as investors anticipated a Fiscal Cliff deal and the market surged on the last day of trading and so far into the New Year. Although it turned out to be a good year for markets around the world, in the US the majority of the gains came in the first quarter when the S&P 500 returned over 12%. For the remainder of the year, it was a challenging period to invest as investors dealt with continuing drama out of Europe, a struggling Chinese economy and ongoing sluggishness here in the US. As the year unfolded the US election took center stage and then the fiscal cliff drama as the year ended.  In Europe and elsewhere, financial markets calmed as the year unfolded and equity markets moved higher in the second half of the year. So as the year ended, the S&P finished the year with a 16% return while Global markets actually finished slightly higher at around 17%+.

Looking ahead, I am cautiously bullish as I feel that the US economy can start turning higher and companies may be able to grow revenues and increase profits at a higher rate than in the past year. Europe is still in recession but may have hit bottom and could improve slowly. China also seems to be rebounding and growth in China will help the rest of the world. 2012 was marked by coordinated easy monetary policy around the world and this is likely to continue in 2013. If the Fed continues to pump liquidity into the US economy and interest rates (Treasury Bonds) stay in a modest trading range, then that should be good for equity markets assuming troubles don't arise elsewhere in the world. I'd like to get through the first quarter earnings cycle to hear what companies are saying about business prospects.  Expectations are for economic growth to move slightly higher to 2.5% or so in 2013. Housing should also continue to improve. If so, I anticipate that cyclical growth companies may do better this year such as Industrials, Materials and Technology while defensive sectors like Consumer, Telecom and Utilities may lag a bit. So if investing in Equities, I favor adding more exposure to these sectors along with increasing the international equity exposure. Although I continue to like large caps I also feel mid- and small-caps caps could continue to do well as Investor risk appetites continue to increase. Finally, since dividends were not taxed at a much higher rate in the Fiscal Cliff deal, these stocks should also fair well. (Talk to your investment professional about different ways to invest in these areas.)

On the fixed income front, 2012 was a mixed year with US Bonds underperforming most categories. 2013 could be a tough year as the great bond bull market appears a bit long in the tooth. Recently the Fed tied its outlook on monetary easing to getting to an unemployment rate of 6.5%.  So, with the rate now at 7.8% there is some runway for rates to stay at current levels, but absent a macro shock somewhere in the world, it seems unlikely that bond prices will rise as the unemployment rate falls. With Treasury yields low, it will be tough to make a decent return on US Bonds. So I favor a diversified strategy in fixed income with exposure to short and intermediate maturity Corporate bonds, TIPs, some long term corporate bonds, high yield bonds, foreign and emerging market bonds and preferred stock holdings. Since the muni bond exemption was not altered I like the muni sector to buy as well for taxable portfolios. 

The next big deadline for politicians is March 1st, so unless progress is made on government spending cuts and increasing the debt ceiling, the market could get volatile to the downside as we approach that date. Therefore, when making any investment decisions, we will do so with an eye on what's going on in Washington and the economy. Hopefully they don't keep us hanging until the very end again and economic numbers improve throughout the year.  

DISCLAIMER: The material represents the views of Bob Centrella, CFA and the information is believed to come from reliable sources. Although we have reviewed the material we can’t guarantee the accuracy and completeness of all the information. Do not rely on this information alone to make investment decisions. The information contained in this blog is not intended to constitute financial advice, and is not a recommendation or solicitation to buy, sell or hold any security. This blog is strictly informational and educational and is not to be construed as anykind of financial advice, investment advice or legal advice. We urge you to talk to a financial professional before making investment decisions for a discussion of risks involved

Bob Centrella, CFA, President/Managing Partner, Forza Investment Advisory LLC, a Registered Investment Advisor. THE ABOVE IS AN EXCERPT OF THE FORZA WEEKLY NEWSLETTER.  FOR THE FULL VERSION OF THIS NEWSLETTER, YOU CAN GO TO WW.FORZAINVESTMENT.COM AND SUBSCRIBE FOR FREE TO OUR WEEKLY NEWSLETTER.

Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtained from www.ForzaInvestment.com.

You can call at 908-344-9790