Will the Market Take It All Back In 2013?

We are just days away from closing the books on a fairly good year for the stock market. The broad consensus in the market is for the trend to continue into the New Year, giving us gains comparable to what we got in 2012. Driving this optimism is a combination of the improving domestic housing scene, a less worrisome Europe, and signs of life in the China growth story.

With all the hand-wringing surrounding the fiscal uncertainties, one would have expected investors to be a lot gloomier in their outlooks. But that’s not what we see in the market.

So is that it? Should we find assurance in the market’s recent price action and stop worrying about the U.S. and world economy? After all the Fed is on the case, and nothing could go wrong when it stands ready to keep interest rates down.

All of this sounds quite plausible, but I don’t buy it.

My reading of the ground realities leaves me reasonably confident that the market will be giving back most if not all of its 2012 gains in the coming year.

Just like this year, professional forecasters have been hoping for a second-half GDP recovery at the start of each of the last three years. But we always had corporate earnings to fall back on when the ‘second-half recovery’ wouldn’t show up. Unfortunately for us, the earnings cycle is over and wouldn’t be available to prop stocks up this year.

I am not making a recession call, though a fall off the ‘cliff’ would do just that. What I am expecting, however, is a far tougher environment for the broader stock market indexes than what we saw in 2012. And while here would still be plenty of profitable investment opportunities in the stock market in 2013, the overall orientation of your portfolio should be defensive. Such a posture may not get you home runs in the market, but you wouldn’t have to lose sleep over your capital either.

Source: Zacks