January is the time of year when strategists, economists, gurus, etc. all join in on the annual nonsense of predicting “What’s going to happen in the markets for 2013?”
-Jeffrey Saut, managing director, Raymond James
"It's what you learn after you know it all that counts."
– Earl Weaver, former manager of the Baltimore Orioles
January is the time of year when strategists, economists, gurus, etc. all join in on the annual nonsense of predicting “What’s going to happen in the markets for 2013?” For many, this ritual is an ego trip, yet as Benjamin Graham inferred – forecasting where the markets will be a year from now is nothing more than rank speculation. Or as I have noted, “You might as well flip a lucky penny.” Manifestly, while forecasting is fun, it should in no way be construed as investment advice. That is why I try hard to avoid the annual guessing game and attempt to focus on what the markets are “saying,” which sectors look favorable, and which stocks I want to own in the new year. “Listening” to the message of the market in December 2011 produced this commentary in my 12/27/11 strategy report:
“Speaking to 2012, I remain steadfast in the belief there will be no recession, nor will Euroquake pull us into one. I also embrace the theme that the nation is moving in the direction of energy self-sufficiency and that an American manufacturing renaissance is taking place. Moreover, there appears to be the hint of a housing recovery, as well as a technology revolution. Combine these beliefs with the demographics of a baby boom echo, which should foster a new cadre of investors, and I think the SPX will have a mid-to-high single-digit return in 2012. If you layer in a 3% - 4% dividend yield on top of said return, the allure of equities becomes pretty compelling.”
While that diatribe did not produce a single-point target for the S&P 500 (SPX/1485.98) in 2012, it did target a total return range of between 9% and 13%. When overly “pressed” for a prediction, however, I tend to use the average yearly return for the SPX since 1926 of about 10% per year and add that to the SPX’s December 31st closing price. In this year’s case that would target 1570. Nevertheless, remember that over the past 86 years 5% per year of that return has come from earnings growth, 0.8% from price-to-earnings (P/E) multiple expansions, and a large 4.2% from dividends. Further, since 1926 the SPX has provided an average return of 15.4% when a Democrat was president versus 7.8% under Republican leaders. Still, those returns may be misleading since the Fed’s monetary policy is more important than who is president, but I digress.