A decade of market savants came out in the Dec. 17 issue of Barron’s with an unrepentantly bullish outlook for stocks in 2013. Their average predicted gain was 10%, with increases ranging from Adam Parker’s uninspiring 1.4% to Stephen Auth’s euphoric 17.4%. Achievement of the latter would put the S&P 500 index within a stone’s throw of its all-time high.
Rarely do we see financial houses – which have stuff to sell to investors – trotting out pessimistic messages during Advent, so the forecasts of Parker (of Morgan Stanley), Auth (of Federated Investors) and the other eight aren’t surprising. They variously cite improving circumstances surrounding the European sovereign debt situation, economic growth in emerging markets, and a likely retreat from the fiscal cliff.
And the Barron’s writer assure us, albeit in little more than a footnote, that, oh yes, these folks do remain well aware of the potential risks, which simply consist of their possibly being wrong about all of the aforementioned reasons that they otherwise adduce for being optimistic.
But I think they missed one risk. And it’s a potential doozy.
In fact, it’s at the top of the list for three even more heralded stalwarts who are just as unrepentant in their warnings about the financial markets. Indeed, Pimco’s Bill Gross and Mohammed El-Erian coined the “New Normal” tag a couple of years ago to describe the economic and investment effects of global deleveraging that has been under way for a while.
Slow economic growth, they contend, will continue for perhaps many years. The days of 10% average annual stock market returns are over, they say. Instead, investors should expect “bite-sized,” single-digit returns – for a long, long time.
Also comes star bond fund manager Jeffrey Gundlach, who shares in the gloom. He avers that a “financial catastrophe” is en route, and investors should thus focus on capital preservation and inflationary times.
And economist A. Gary Shilling is no less dour, declaring that a market plunge is inevitable. The rise in equities over the past year, he says, has been due to a contrived factor: the Fed’s easy-money response to an ailing economy. Investors have come to pin their hopes on the Fed’s actions (the “Bernanke Put”), he says, instead of the reasons for those actions.
“I disagree with the ‘It’s so bad, it’s good’ crowd,” Shilling says. “Conditions are so bad, they are just plain bad.” He says it will take up to seven years for Fed stimulus to have any effect on the economy, and thereby the markets, because it will take that long for global deleveraging to run its course.
“This grand disconnect is profoundly unhealthy – and a reconnection is inevitable,” Shilling says. “When that happens markets will nose-dive.”
Can the markets continue to rely on bad news being good news for seven years? Can such reliance last even into 2013? Who knows? But do you want to take that chance?
I don’t, especially since I’m in the Baby Boomer generation that has increasingly less time to recover from investing accidents. If you’re in the same circumstance, here’s a recommended investment allocation as we head into 2013:
80% in individual corporate bonds
Bond funds expose you to “maturity uncertainty,” i.e., you simply don’t know what the value of your principal will be at any given point in the future. Therefore, build a ladder of individual, investment-grade corporate bonds for the bulk of the portfolio.
20% in higher yielding bonds
Stay away from pure junk-bond funds. Instead, I would suggest a combination of closed-end bond funds and the Stable High Yield model that I manage at Covestor.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.