2013 is fast approaching. If 2012 was any indication, 2013 will continue to be driven by headlines. So here are the five headlines I predict we will see in 2013 that will have an impact on investors:
1. "All Eyes on Washington D.C. as Markets Wait for Deal"
Washington D.C. will continue to be in focus during 2013. With the election in 2012 not changing the make up in Washington, and a lack of seriousness from policymakers, investors will still need to keep an eye on Washington. The Fiscal Cliff deal may turn out to be just another case of politicians kicking the can down the road. If this is the case, Washington will have to deal with another debt ceiling debate. Both sides of the aisle seem unable, or unwilling, to deal with the need for competitive tax reform and tough entitlement reform. Until those are dealt with, Washington will continue to grab more headlines.
Another way Washington will be in the news is Obamacare. The law begins to be implemented in 2013 and already businesses are finding problems with it. This includes the increase in taxes on investment income starting in 2013. Also, businesses will have to begin to prepare for the employer mandate and penalties on insurers which goes into affect in 2014. The impact of these new fees and regulations will start to be digested by businesses, and the impact they have on decisions will begin to display itself late into 2013.
There is also the uncertainty of Dodd-Frank that still hangs over the financial sector. Financial institutions are still unsure about all the regulations mandated in the bill. For example, the Volker Rule has yet to even be clarified by regulators. Also, many institutions have no idea if they will be designated "systematically important". This is combined with the fact that the U.S. Risk Council has decided to increase its regulatory oversight of Funds under their authority in Doodd-Frank.
2. "European Debt Fears Weigh on the Market"
Europe is far from in the clear when it comes to their debt crises. This almost makes it certain that they will also receive many headline in 2013. Chancellor Merkel even admitted that the European Union faces years of "painful reforms, slow growth, and high unemployment". Spain is expected to see a continued recession through 2013 and unemployment rates of around 25%. Spain is still dealing with bad loans from the housing bust in 2008.
Greece should still be worried about, but so should Cyprus and Italy. Italian Prime Minister Mario Monti just announced his sudden resignation. This means Italy will have new elections and will lead to more uncertainty for the Eurozone. France is also seeing a slowing economy and has elected a government seemingly bent on driving out anyone who has money inside the country.
Europe's problems continue to be government spending and poor economic growth. If the Eurozone does not make changes to be more business friendly and to have smaller government balance sheets, the world will be talking about Europe for a long time. Much like in Washington, it seems that the real problems are failing to be addressed by politicians.
3. "Ben Bernanke's Gamble Leads to….."
Most agree that Ben Bernanke is taking a huge risk by continuing quantitative easing and low interest rates until unemployment is at 6.5% or inflation reached 2.5%. The Fed's balance sheet continues to grow, as more money is pumped into the economy. If economic activity picks up even slightly, inflation and high interest rates could cause a large shock to the market. Richmond Fed President Lacker and Dallas Fed President Fisher both believe that the problem in the economy is not liquidity, but poor fiscal policy from Washington. Fisher went so far as to call what Bernanke is doing akin to Hotel California where you can check out but you can never leave.
Ben Bernanke could be able to raise rates at the perfect time to avoid inflation and high interest rates. That is why the rest of the headline is unfinished. If Bernanke times his actions perfectly, the U.S. economy may be able to avoid a serious shock from interest rates and inflation. If Bernanke does not time his actions properly, the economy could see significant challenges. There is still uncertainty about if or when we will see this play out in 2013; 6.5% unemployment seems pretty far away, and inflation, according to the Fed's measurement, may not move that much in 2013. Still, the laws of economics will catch up with the United States monetary policy. The question is, when and are we well positioned to handle it.
4. "What's Next for Apple?"
Apple (AAPL) has been reeling lately. Downward revisions in price targets, end of the year tax selling, and bad news in China have really hurt Apple. Many are asking is the bloom off the rose for Apple. After the unfortunate passing of Steve Jobs, Apple seemed to have lost some of its magic. Android products are quickly taking market share. I think 2013 is going to be a pivotal year for Apple.
The company really needs a new revolutionary product or a very innovative upgrade to their current product line. This will help boost demand. Apple has to prove it can still be a game changer after Steve Jobs. If it does not do that, investors may start to look for another trendy company to put their money in. I am not saying Apple is not a great company, but its star may come back to Earth if 2013 is not a better year.
5. "Investors Continue to Look for Growth"
Let's face it, the U.S. economy is still pretty sluggish and Europe is a total mess. Given these factors, investors will be looking for growth. The S&P 500 is projected to have EPS growth of only 7.8%. Fortunately, there are some great companies that have fantastic balance sheets and great global operations that can provide that growth.
Lululemon (LULU) continues to be an impressive young retailer. Even with their cautious guidance, 2013 still looks like a great year for Lululemon. Compared to other retailers, it is undervalued with a 44% earnings growth forecast for 2013 and a P/E ratio of 40x forward earnings.
eBay (EBAY) is still a company that is benefiting tremendously from PayPal and will continue to see that growth in 2013. PayPal has positioned itself as a bank for people who do not have, want, or need a normal bank account. PayPal is also continuing its expansion into retail with its partnership with Discovery. While pricey at its current levels, it may be a good place to allocate funds until other higher growth names go on sale.
Costco (COST) has a strong following among consumers. Costco continues to provide great value to the consumer and are being rewarded for it. Costco is going to continue to grow in 2013. With expected EPS growth of 13% in 2013 and a forward P/E ratio of 21.6, Costco may be a growth name that will help keep investors happy for 2013.
Emerging markets are also going to be key for investors as well. Any well-diversified portfolio should have investments in emerging markets, but 2013 will prove why that principle is important. China and Brazil seem to be places most investors will be able to find growth in 2013. While the U.S. and Europe deal with serious debt issues, these emerging markets are growing at impressive rate. Until the U.S. and Europe figure out a way forward, investors should look into emerging markets to replace the missing growth in their portfolios.
No one knows exactly what will happen in 2013. What is certain is that 2013 will have the continuation of some important storylines that started in 2012. Diversification and research may be the most important tools in 2013 for investors.