Equity Markets’ Good Performance in 2012 Sets the Stage for 2013

Tuesday, January 08, 2013 09:40
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Equity Markets’ Good Performance in 2012 Sets the Stage for 2013

Stock markets both here and abroad had a good year in 2012. So is now the time to get back into the stock market? Are you ready to jump in with both feet?

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Not so fast. It’s important to take a close look at what occurred in 2012 so we can assess the opportunities and prepare for the surprises that 2013 will bring. The following are some thoughts about U.S. markets. For a full, highly detailed examination of U.S. and international markets, see “2012: Resumption of the Stock Market Recovery,” at PPCA Commentaries.
 
1.     Investors bailed from equity mutual funds but corporate-share buybacks more than offset this exodus. Also, much of the stock mutual fund redemptions found their way into stock ETFs, a move from active to passive management.
 
2.     Infrastructure stocks – energy and materials – have lagged the total market and have exhibited higher risk. These sectors have disappointed on a relative basis, despite expectations that government spending would favor them. I think these stocks are still a good play, especially if China and India resume their growth.
 
3.     Health care has dominated the market on a risk-adjusted basis, providing a 20% return with below-market risk. Medical companies have been among the largest share repurchasers. Obamacare will matter in 2013 and beyond, benefitting some segments of the health care market, like pharmaceuticals, and undermining others, like health insurers.
 
4.     Financials recovered in 2012, returning more than 25%, albeit with relatively high risk. This performance is a reversal of the previous four years, during which financials lost 42% while the total market lost 5%. As described in my 2011 commentary, the style classifications of fallen financials distorted some benchmarks through 2011, but they are now correct again. Financials will struggle in 2013 because we are likely to see increases in interest rates.
 
5.     Consumer discretionary stocks were the next best performing, after financials, with risk near the market. Investors perceived that consumers had sacrificed long enough, saving more and spending less, at least those with jobs. Christmas spending did not confirm this perception, with spending roughly the same as 2011. I would not expect consumer discretionary stocks to continue to lead in 2013.
 
6.     Technology stocks did not deliver returns commensurate with their risk. In particular, large-value technology stocks (no oxymoron) were a drag on performance in the year, and I think these stocks will come back in 2013. 
 
7.     Consumer staples underperformed the market with less risk. Look for these companies to defend well if we see another recession. We have to eat.
 
8.     Value outperformed growth, although growth was riskier. Given the uncertainties facing the U.S. economy with the debt crisis and the possibility of another recession, value gets my vote over core and growth in 2013, as a flight to safety.
 
The commentary also takes a longer view, looking back over the past 87 years:
 
 

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