Equity investors should remember the strong tendancy for the first two years of a presidential term to be weak, the third year to be very strong, and the final or election year to be fairly strong.\u00a0 Politicians postpone the \u201cbitter medicine\u201d until after the election, depressing GDP and stock prices in\u00a0Years One and\u00a0Two of the presidential term.\u00a0 That paradigm is very relevant now.\u00a0 Even though we are limping along with 1% GDP growth, an ISM Manufacturing of around 50, Europe in recession, and underwhelming\u00a0growth in BRIC countries, the U.S. economy in 2013 will face:<\/p>\n
This is a big dose of austerity for a weak economy, and the Fed can’t help because it is out of ammunition.\u00a0 Admittedly the Fiscal Cliff\u00a0deal eliminates uncertainty regarding tax rates.\u00a0 The stock market was right to rally big today; it dodged a big bullet because tax rates and dividends and capital gains remain at equal, and fairly reasonable, levels.\u00a0 But tax hikes, spending cuts, and continued fiscal rancor in Washington \u2013 which Obama foolishly exacerbated on New Years Eve by gratuitously taunting Congressional Republicans\u2013 will keep growth anemic.<\/p>\n
Complacency has increased, with strategists in the Barron\u2019s<\/strong> survey more bullish on the year ahead in December 2012 than they were a year earlier–even though the PE is higher and earnings momentum is lower.\u00a0 Analysts forecast $113 in 2013 S&P 500 EPS while strategists are at $108 (versus ~$103 in 2012).\u00a0 While $108 looks reasonable, the probability of surprisingly strong earnings (as we had in the first half of 2012) is low.\u00a0 At 1460, the S&P 500 is trading at 13.5 x 2013E EPS.\u00a0 By year-end 2013 the trailing PE could well be 14.5x \u2013 15x (compared with an average of 16.2x, 2005-H1 2007), implying a 9% price rise this year to 1600 \u2014not bad in a low-single-digit world.\u00a0 However, administering to a weak economy a toxic policy mix of anti-growth regulation, spending cuts, and tax hikes\u00a0focused on the most productive workers means we may well get recession scares over the course of this year, leading\u00a0 to significant stock market volatility.<\/p>\n Copyright Thomas Doerfligner 2013.\u00a0 All rights reserved.<\/p>\n","protected":false},"excerpt":{"rendered":" Equity investors should remember the strong tendancy for the first two years of a presidential term to be weak, the third year to be very strong, and the final or election year to be fairly strong.\u00a0 Politicians postpone the \u201cbitter … Continue reading