Certainly, all were still eyeing Capitol Hill warily, waiting to see if Congress and the President would drive the country off the "fiscal cliff," a combination of automatic spending cuts and tax hikes set to be triggered January 1, almost certain to plunge the country into recession.
However, most had concluded that a drop off the cliff was unlikely. More likely, the negotiations would drag on into January, when both parties would eventually make enough small compromises to assuage the runaway deficit for the short term. Various strategists dubbed this outcome a mere fiscal "bump," or "bungee jump," meaning it would still cause an economic slowdown, but a much smaller one than if no agreement were reached.
Economists' consensus for GDP growth in 2013 was around 2% in late November, but looked to be edging lower amidst worries about the cliff. Meanwhile, most analysts expected policy makers to push the real task, a substantial overhaul of entitlements, off to some time in the future, perhaps the next Congress.
Yet observers had become so accustomed to the problems that they viewed them as "annoyances to resolve, rather than obstacles to fear," in the words of Sam Stovall, Chief Equity Strategist at S&P Capital IQ.
By late November 2012, the S&P Capital IQ investment committee was forecasting the S&P 500 would climb 10% over the next 12 months. The committee predicted a year-over-year growth in global regional GDP, saying that most regions would have already hit their nadirs in growth by New Year. "On the whole, worldwide growth likely bottomed in Q3 2012, whereas the U.S., because of the effects of Hurricane Sandy, will likely see its trough in the fourth quarter," Stovall wrote in a report. He also believes the slowdown in the S&P 500's profit growth ended last summer.
Now, S&P Capital IQ is forecasting that operating earnings-per-share will climb throughout 2013, posting gains each successive quarter. Although the estimates could be revised downward, Stovall believes that would likely only happen if many other factors, including global GDP growth, got dramatically worse.
Although the market has rallied strongly from its lows and is no longer a bargain, many commentators say valuations are still attractive. As of November 23, the S&P 500 was trading at 13.9 times trailing 12-month operating EPS. That's a 22% discount to the norms since 1988. If you look ahead, the S&P 500 is trading at 12.4 times projected 2013 operating earnings, a 31% discount to norms.
But, not all observers think it's safe to assume that companies won't lower 2013 earnings guidance in the face of looming tax hikes that could slow growth. Some, like Stephen Biggar, S&P Capital IQ's head of global equity research, point out that companies lowered forward expectations in the third quarter of last year as cost cutting couldn't keep offsetting feeble revenue growth. "This trend is likely to continue, in my opinion," he wrote.
Yet, others say the economy has turned a corner. Jim Paulsen, chief investment strategist for Wells Capital Management, argues that despite the slow pace of the recovery, its character broadened considerably in the last year, making it more robust, and less vulnerable to external shocks. He points to a laundry list of hopeful signs in the past year, including stronger jobs figures, climbing consumer confidence, rising home prices and housing activity, plus a revival of bank lending. The consumer's balance sheet is improving, too, and household debt is declining. What's more, there's much less panic in the stock market. The VIX volatility index has dropped and stayed relatively stable. He is also bullish on China and other emerging market economies, arguing their improvement should scupper fears of a global recession, and should boost U.S. exports. In fact, Paulsen thinks things are so much better than Wall Street realizes that the U.S. economy will grow at 3% rather than 2%, this year.
Linda Zhang, a quantitative portfolio manager at MFS Investments, sees signs that the U.S. stocks are undervalued. She notes that the equity risk premium—the earnings yield over ten-year Treasury yield—is close to 6%, the highest it's been in a very long time, suggesting "a pretty big value displacement" between stocks and bonds.
Jeff Zhang, chief investment officer, active strategies at Mellon Capital, ( no relation) also finds stocks attractive, and says that the continued easy monetary policy from central bankers around the world will provide a lot of support to buoy stock prices everywhere. "We see more upside in the long term," he said. And he advises anyone who's still sitting on cash to seize the day. "If you missed the rally in the U.S. and global markets, and there's a significant correction, this could be a great buying opportunity in the next couple of months," he said.
