2013 should look a lot like 2012 to investors, and for the same reasons. The first four months are likely to represent the entire net gain for the year, the next four months will be choppy, but flat, and the final four months will depend entirely on whether the Fed intends to chip in another trillion dollars for 2014.
Our investment strategy remains the same as 2012. You will recall, we were constructive on the markets through April, sold in May as the Fed money began to dry up, and then jumped back in mid-June, when the market sell-off brought the Fed back in with another $600 billion. Chairman Bernanke has committed to a little over a trillion dollars worth of mortgage and Treasury debt purchases for 2013, so all will be well as long as the spice flows.
The bad economic news will begin to pile up through the summer months, however, and it will be difficult for markets to hold their spring gains. State and Federal tax increases on the poor and middle class will take a big bite out of consumption. The labor participation rate (the best indicator of actual employment) will remain at 30-year lows, and may have another leg down as the cost and hassle of hiring employees goes up.
Ironically, what is bad for the economy is terrific for stock and bond markets. Every downtick in the economy increases the likelihood of another trillion from the Fed. So we will manage as we did in 2012- stay until May, go away, let the market sell off, then wait for the Fed to announce new stimulus, and buy back in.
The risk- and why we sell in May- is that sooner or later, someone is going to question how high the Fed can go. Any discussion of capping the Fed balance sheet, regardless of the number, will bring this whole scheme to a screeching halt. At that point, having reduced exposure to equities will be a huge relief.
Finally, you will notice there is no mention here of the fiscal cliff, debt ceiling, or economic growth prospects. All of these are irrelevant except insofar as they affect Fed monetary policy. My guess is that the whole thing goes ‘pop’ by early 2014. Until then, we need to take what is being given, while being ready to push ourselves away from the trough at the right time. As the saying goes, “Pigs get fed- hogs get slaughtered.”
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