The stock markets of the world have been overly volatile for several years and investors have their guard up. What’s in store for 2013?
A review of the stock markets during 2012 makes for surprising reading and a glint of good news. Factor in the stalling US economy and a presidential election, the European debt crisis and a fiscal deadlock in Washington and you’d have expected a weak stock performance overall. Despite this we saw annual gains on the Dow Jones of 7%, the S&P was up 13% on the year and Nasdaq showed gains of 16%. There were some notable performers (Apple and Bank of America) and some high profile IPOs with Facebook’s initial public offering at $38 falling sharply to $17.73 before recovering ground to a close of $26.62 at the end of the year. The EU bailout of Spanish banks in the summer instilled investor confidence in Europe as the EU clearly signaled that it would take whatever steps necessary to protect the union. The Federal Reserve played its part by starting the third round of its bond purchase program in order to drive down interest rates and encourage investment and borrowing. The volatility we’ve experienced in recent years is likely to remain throughout 2013 and investors will need to accept this and use it to their advantage. As Warren Buffet so astutely suggested, there are two types of experts when it comes to stock market predictions; those who don’t know and those who don’t know they don’t know.
There’s a division in opinion over predictions for 2013, as there always is at the beginning of a new year. The general consensus falls into two distinct camps; those who believe the year will be flat and those who are predicting increases similar to those seen in 2012. A recent survey by Populus in the UK showed high levels of confidence in the wealthier demographic offset by a more gloomy outlook from the less affluent. Overall confidence in the major western economies is still low but there are always gains to be identified for the savvy investor.
The largest stock market gains during 2012 have been seen in the smaller economies with Venezuela showing the largest increase at 295% and strong performances in Egypt EGX30 and Istanbul, both at +57%. The Far East showed gains despite a growth slowdown in China and the Philippine Exchange gave an overall 36% return on the year. We are likely to see a similar pattern emerging this year and Africa is being widely tipped as a potential performer, in particular Kenya and Nigeria. It’s also worth looking east to India as the government begins to strip out foreign investment barriers in an attempt to speed up growth.
The big winners for 2012 were Bank of America (NYSE:BAC) showing an increase of 108.63% and the best of any stock in the Dow Jones industrial average. PulteGroup (PHM) was the strongest performer on the S&P 500 at +187.80% followed by Sprint Nextel (S) at +142.31% and Whirlpool (WHR) at +114.44%. At the other end of the scale Hewlett-Packard (NYSE:HPQ) had a dismal year at -44.68% with retailers Best Buy (BBY) showing -49.29% and J.C. Penney (JCP) falling -43.93%.
At the end of the year nine out of ten of the S&P index sectors showed gains with finance leading the way posting an increase of +26%. The underperformer was utilities, ending the year down -1.8% overall. Health stocks have looked attractive having increased +16% and are being widely tipped as one to watch alongside consumer-discretionary stocks.
The overall view is that we are likely to see a slow and steady growth period and John Carey, Executive VP at Pioneer Investments is cautiously optimistic. “We’ve had good economic numbers, earnings are holding up, dividends are attractive and balance sheets are solid. That would tend to point to another year of moderate growth and a fairly good environment for stocks.”
Douglas Blake, Senior Wealth Manager, Newbridge Securities suggests that the financial sector is primed for above average returns yet again. “The financials are the lifeblood of the US economy and therefore the stock market. In 2011 this was the worst performing sector and in 2012 they were the best performers. Seeing this sector perk up suggests that the future is brighter for the US economy.”
Other analysts feel that this optimism is unfounded and history demonstrates that we see an average 8% increase in stock prices during a US election year, followed by an average gain of 4% during the first year of the presidential term. Although past results and historical data is by no means an accurate indicator of what will happen next we can expect these consistent cycles to have some impact on performance. A recent report from John Hancock Mutual Funds confirms that the stock market shows small gains in the first two years of a presidential term whilst showing more substantial gains during the second half of the term. This suggests that a buy and hold strategy during 2013 could pay off for those with the means and liquidity.
Another useful indicator of what to expect is the Santa Claus rally, which is often an accurate predictor of the forthcoming year. Yale Hirsch of The Stock Trader’s Almanac studied the last five trading days plus the first two of the New Year for each year since 1950. He found that the this seven day Santa Claus rally period has averaged a 1.5% gain in stock prices and this average can be used as a good sign of expected performance. If the Santa Claus rally doesn’t materialize then the year often turns out to be bearish.
If you’re looking for the safest course than banking on the banks seems to be most widely tipped but those with the most sizeable cash balances are seemingly also looking towards healthcare. Happy hunting with whatever path you choose this year.