SAN FRANCISCO A Wall Street adage says that time in the stock market beats timing the market. But in 2012, both of those strategies worked.
Many stock investors believe 2013 will be their lucky number. They point to a menu of research reports lauding corporate America’s relatively strong financial shape and the prospects for the U.S. economy’s steady, however slow, growth. By this logic, even holders of low-yielding bonds can expect a steady road for non-government debt, as long as the Federal Reserve holds the line on short-term interest rates.
That said, this bull market turns 4 years old in March – well past the 2 1 / 2-year historical average for U.S. bull runs. Accordingly, this year the major market action may be outside the United States. Heading into 2013, the eurozone seems to have priced in its economic troubles for now, and Asia appears to be the growth engine of a global economy that is still debt-laden and disturbingly weak.
Some strategists in fact see non-U.S. stock markets, including the austere eurozone, besting U.S. equities in 2013. That’s saying a lot, given predictions for the benchmark Standard & Poor’s 500-stock index to hit 1550 or perhaps 1600 (a record high) a year from now.
Here are 10 portfolio moves to consider:
1 Mega-cap stocks go big
“The new leadership within the equity market is mega caps,” Mary Ann Bartels, technical research analyst at Bank of America Merrill Lynch, wrote in a recent research report.
Mega caps – the top 50 U.S. companies by market value – are “reversing a bear trend that had been in place since 2000,” Bartels adds. “This reversal signals a new secular bull market is under way for the top 50, or mega caps.”
The U.S. market’s giants also have considerable foreign sales exposure, which favors them should non-U.S. economies shine brightest.
2 High-quality companies stay qualified
The definition of “quality” in this bull market is a large company with strong finances, visible earnings growth and a global footprint. A dividend makes the stock even more attractive.
High-quality stocks are “quite inexpensive,” Savita Subramanian, Bank of America Merrill Lynch equity and quantitative strategist, noted in a recent research report. Plus, she adds, “industry leaders with clean balance sheets in a wide variety of sectors rank well on the quality scale.” Top-flight firms on Merrill’s list include PepsiCo Inc., IBM Corp. and Caterpillar Inc.
Quality plus growth equals stability, adds Brian Belski, chief investment strategist at BMO Capital Markets.
3 Dividend growth pays off
“Dividends still matter,” says Paul Nolte, managing director at investment manager Dearborn Partners. “There remains a lack of good choices for income investors,” he adds. Ultimately this quest for yield leads to stocks. Moreover, investors have no dearth of dividend-payers: 80 percent of the S&P 500 constituents now pay a dividend. Nolte’s favorites include multinational leaders Caterpillar Inc., Novartis AG, IBM and McDonald’s Corp.
That said, investors should focus on the business, not the yield. A high yield can reflect a poor-quality company, a troubled stock and a dividend that could be in jeopardy.
Look instead for companies with a record of dividend growth, suggesting they are generating ever-larger amounts of cash to hand to shareholders. A broad proxy for the strategy is the exchange-traded SPDR S&P Dividend ETF, which tracks an index based on the S&P Dividend Aristocrats – companies hiking dividends for at least 25 consecutive years.
4 Europe goes up
Eurozone worries for now seem priced into market valuations and expectations. The MSCI Europe ex-U.K. Index, a proxy for the eurozone, rose 19 percent for the year through Dec. 20.
Moreover, two-thirds of managers responding to the Russell survey, for example, do not see a eurozone nation exiting the monetary union, and better than half are maintaining current exposure to the continent.
5 China breaks out
China hasn’t taken part in the global rally, but that could change.
Strategists at Russell Investments predict a soft landing for China’s economy, with a cyclical recovery pushing 8 percent annualized growth for 2013. Managers polled in Russell’s most recent quarterly Investment Manager Outlook were also bullish, with 62 percent of respondents expecting China’s new leadership to stabilize the country’s declining growth.
In addition, the Russell survey showed bullishness for emerging markets generally, with almost seven in 10 managers optimistic about the region’s development after 2012’s disappointment.
6 Go for the gold
How does $2,000 an ounce sound as a price for gold? That’s the target Merrill Lynch analysts have set for the yellow metal by year-end – about 20 percent higher than now.
The easy-money policies of the European Central Bank and the Federal Reserve will propel gold higher, according to commodity strategist Francisco Blanch at Merrill Lynch. Rising inflation expectations should also be supportive. Notably, Blanch sees gold at $2,400 an ounce by the end of 2014..
7 Real estate builds
The U.S. housing market is laying a new foundation.
Supply and demand are finding greater equilibrium. Home sales are up, inventory is down, and mortgage rates are at historic lows. In Russell Investment’s most recent quarterly Investment Manager Outlook, 61 percent of respondents were most bullish on real estate for 2013, an all-time survey high. The housing recovery should create construction jobs and boost related sectors such as furniture, building materials and financial services, according to Merrill analysts.
Real estate investment trusts have been on a tear. Real estate mutual funds, many of which invest in REITs, were up 17 percent as of Dec. 20; much of that interest is driven by yield. Some broad-based funds did even better. Baron Real Estate Fund, for example, has gained 42 percent for the year so far.
8 Industrials steam ahead
An improving economy boosts cyclical sectors of the market, and industrial stocks are prime beneficiaries. These stocks rely on corporations’ capital outlays, and many analysts expect companies to spend more liberally with less uncertainty plaguing the global picture.
Industrials also have the greatest proportion of high-quality stocks of any other U.S. market sector, according to Merrill Lynch, and many of those have the added attraction of being mega caps -- Caterpillar, for example. Plus, the industrials sector trades below its historical average P/E, Merrill notes, particularly conglomerates or companies in the machinery business.
9 Technology plugs in
Technology stocks came under pressure late in 2012, but the sector’s oversized exposure to non-U.S. markets could work in its favor next year, according to Merrill analysts. Tech companies also tend to have strong cash flow, little debt and some pay dividends.
“Improved visibility on the domestic policy front coupled with signs that Europe is beginning to heal could have very positive implications for capital spending and global growth,” a Merrill research report recently concluded.
10 “Dogs of the Dow’ have bark and bite
For a hefty helping of size and income that plays into both the mega cap and dividend themes, investors can scoop up the 10 highest-yielding stocks in the Dow Jones Industrial Average, also known as the “Dogs of the Dow.”
This value-oriented tactic calls for buying the index’s 10 highest-yielders at the start of each year. The Dogs didn’t hunt so well in 2012, gaining just over 7 percent on a price-only basis through Dec. 20 versus a 9 percent return for the 30-stock benchmark itself.