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Brian Rehling is Wells Fargo Advisors' chief fixed income strategist and is on Wells Fargo's Investment Strategy Committee and Allocation Advisors Committee.

Harlan Levy: What do you take from the November job total - 146,000 nonfarm jobs - and the new 7.7 % jobless rate, down from 7.9%?

Brian Rehling: It is consistent with slow-growth, very slow improvement. It wasn't as great as it looked on its face, as there were some downward revisions from the previous month, and some of the improvement was not as meaningful as the numbers indicate. But it continues the theme we've been seeing, a slow, gradual improvement in the economy but well below the growth trend everyone would like to see.

H.L.: Can the U.S. economy withstand going over the fiscal cliff?

B.R.: If we go over the cliff, and there is no resolution, and they remain deadlocked well into next year, that would be very serious for the U.S. economy. We would almost certainly be looking for a recession and a contraction next year.

Now I do think that if you go over the fiscal cliff on January 1, and Congress comes down late in January and corrects the problem that would not be as dire an outcome. If we go over it, and corrections and made and it's resolved early next year, we think we'll see positive growth for next year.

H.L.: Do you think Congress will let us go over the cliff?

B.R.: There is a risk there, but I don't think they will. I think they will have some kind of resolution in some form by the end of the year, whether it's a longer-term agreement or kicking the can down the road until they can come to an agreement next year. That last one is a likely scenario. It may be that they implement a number of tax fixes, like making permanent the Bush tax cuts for lower-income brackets and removing some of the automatic spending cuts. Those seem like the obvious places to get an agreement in place, but clearly that leaves the comprehensive reform later this year.

H.L.: You've just issued your outlook for 2013. What do you see?

B.R.: In 2013 we see a continuation of the recovery. We see Gross Domestic Product growth at around 2.5 percent on the back of an improving housing market and a resolution to the fiscal cliff issues. But that resolution is likely to mute growth. But without the fiscal cliff issues we would expect growth to be 3.5 percent. When all is said and done with the fiscal cliff and the implementation of new revenues and spending cuts, that will take about 1 percent off GDP to get to our 2.5 percent target.

H.L.: What do you see for stocks and bonds?

B.R.: We see a continuation of the stock market rally. Our target on the S&P 500 for the end of 2013 is 1,525 to 1,575, and our expectation for S&P 500 earnings is $108. We continue to favor cyclical sectors - like consumer discretionaries, information technology, and telecommunications -- over the more defensive sectors, healthcare and utilities, for example, and we're also underweight financials and energy. We also favor large-cap multinationals in this later-cycle period over less liquid, more domestically focused smaller-cap stocks.

On bonds, we expect the Federal Reserve to remain very active, likely increasing their bond purchases under quantitative easing. The Fed activity should help keep interest rates contained in 2013, but fixed-income investors need to adjust expectations. Double-digit returns are a thing of the past. With interest rates in almost all products near historically low levels and the excess yield over Treasurys in the more risk-sensitive sectors near or below historical averages, there's not really any room for principal appreciation in fixed income from current levels. So investors should become comfortable just receiving coupons.

H.L.: If tax rates go up on the wealthy, will that be a major negative, as the House Republicans claim?

B.R.: We don't think so. It could have some impact for investors with higher dividend rates or higher tax rates, making municipal investments more attractive. Overall, higher taxes over the long term will definitely hamper growth, but it won't have a significant impact in 2013. We think most businesses and consumers are looking for some type of certainty at this point.

H.L.: Will housing actually rebound?

B.R.: We're not expecting a sharp rebound, but continuing gradual improvement is likely and healthy for the economy.

H.L.: Is the deficit the real problem here or is it jobs?

B.R.: Jobs are. Longer term the deficit will be a bigger problem, but in the short term we continue to be able to finance the deficit at extremely low rates with no problem.

H.L.: What do you see happening with the ongoing European sovereign debt crisis and its potential effect on the U.S. economy?

B.R.: They continue to muddle along in Europe. It continues to be a concern and a drag on the global economy, but we do not expect any crisis there in 2013 as they continue to put Band-Aids on the problem. We also don't expect a comprehensive solution over there, either.

H.L.: What's happening in China and how might that affect us?

B.R.: China appears to be bottoming. We think we'll see some improvement next year with the change in leadership. In general, that should be supportive of the Chinese economy, as they get some stimulus measures in place, and that should support the global economy and those multi-national equities we mentioned earlier.

B.R.: To recap, there are a lot of uncertainties present in investors' minds today, and in a rapidly changing world it's important to be flexible and not be locked into a single perspective and assume conditions will not change. Most importantly, investors should be focused on asset allocation and insure investment portfolios remain properly diversified.

Source: Interview With Brian Rehling: 2013 GDP Growth 2.5%, 3.5% Without Fiscal Cliff Issues