With 2012 in the rearview, I offer fifty predictions for 2013 in a host of financial markets. These forecasts serve as my base case for the coming year. Of course, new information will be received by global investors throughout the course of the year, re-shaping the frame of what is possible.
- The S&P 500 (SPY) makes a new all-time high, but closes beneath that plateau for the year.
- The equal-weighted S&P 500 (RSP) outperforms its capitalization-weighted alternative.
- The Russell 2000 (IWM) outperforms the S&P 500 as small caps outpace large caps.
- The shares of Bank of America (BAC) outperform J.P. Morgan (JPM) and Wells Fargo (WFC) on both an absolute and risk-adjusted basis.
- The banking sector (XLF) outperforms the S&P 500.
- Homebuilders (XHB) outperform the S&P 500, but not when adjusting for their variability of returns, which is over twice that of the broader market.
- Apollo Group (APOL), owner of the University of Phoenix, is taken private.
- Safeway (SWY) spins off a portion of its real estate assets into a real estate investment trust, prompting a rise in the shares of the grocer.
- Groupon (GRPN) is taken private for less than half of the value Google (GOOG) had originally offered the firm pre-IPO.
- An activist shareholder takes a major stake in Hewlett-Packard (HPQ), driving the stock to a market beating annual return.
- An activist shareholder takes a major stake in Dell (DELL), driving the stock to a market beating annual return.
- Either U.S. Bancorp (USB) or PNC Financial Services (PNC) makes a major acquisition to broaden their geographic footprint, spurring further consolidation in the banking sector.
- Johnson & Johnson (JNJ) loses its heretofore sacrosanct AAA rating, choosing to re-lever its balance sheet and return cash to shareholders amidst record low borrowing levels.
- Berkshire Hathaway (BRK.A) makes an acquisition in the $20 billion enterprise valuation range.
- My guess is Cummins (CMI).
- Alcoa (AA) is the Dow Jones laggard as persisting unfavorable supply/demand imbalance in aluminum further weakens results and prompts a cut of the company's debt to junk.
- Aubrey McClendon, co-founder and CEO of Chesapeake Energy (CHK), follows up a disastrous 2012 with a strong 2013 as rising natural gas prices drive company results, and his part-owned Oklahoma City Thunder win their first NBA championship.
- Best Buy (BBY) outperforms Amazon (AMZN), which has only 60% of the EBITDA of its bricks and mortar retail competitor, but has a market capitalization 28x higher.
- J.C. Penney (JCP) outperforms Macy's (M).
- Domestic automakers outperform their Japanese competitors as the strong yen and the territorial dispute between China/Japan hurts auto exports of the Japanese firms.
- Newspapers lose their taint as troubled investments as online subscription growth of local and regional periodicals expands.
- Property and casualty companies finally see a mild year for weather catastrophes, boosting results.
- The broad emerging market index outperforms the S&P 500.
- Rising German inflation signals a new leg of the Eurozone crisis as multi-speed economic growth hampers the effectiveness of centralized monetary policy.
- European election results become market moving events.
- Social unrest in China, given the growing gulf between urban wealthy and rural poor, rattles global markets.
- Greek stocks and bonds both post positive returns, but the economy remains mired in recession.
- Italian stocks outperform German stocks, but Spanish assets remain laggards.
- CNOOC's newly acquired Nexen unit acquires stakes in other oil sands players, prompting renewed concerns around Chinese imperialism.
- Japan underperforms other developed markets including the United States.
- Gold mining stocks outperform the physical commodity after prolonged underperformance.
- The 10-yr Treasury bounces between 1.50% and 2.25% before ending the year at 1.95%, producing a slightly negative total return for the year.
- High yield bonds achieve their best returns in January, posting returns only nominally above their coupon for the full year.
- Double-BB rated bonds outperform higher yielding single-B and triple-CCC rated bonds as investors increase the likelihood of default for the most speculative credits.
- Financial sector spreads outperform industrial and utility spreads as balance sheet improvement in the banking sector continues.
- California general obligation debt outperforms the debt of Illinois.
- Rumbles of distress in the municipal bond market again fail to materialize as no city with a population of more than 100,000 files Chapter 9 bankruptcy.
- Non-agency residential mortgage backed securities make a meaningful return to the primary market in less complex form, boosting available home credit.
- U.S. GDP growth of 2.9% outpaces consensus forecasts, driven by a rebounding consumer.
- The unemployment rate ends 2013 at 6.9%.
- Housing prices rise for the year in all 20 major housing markets in the Case-Shiller Index.
- Mortgage rates fall to all-time low in the second quarter as increased competition lowers credit spreads even as interest rates rise modestly.
- Ben Bernanke begins communication about the Fed's timing of ceasing reinvestment of interest from securities on its balance sheet.
- Hugo Chavez passes away, prompting a rally in Venezuelan sovereign debt.
- A leveraged buyout of at least $10 billion is completed in the United States.
- A cyberattack on our nation's infrastructure leads to a minor risk flare in financial markets and Congressional investigations.
- Social Security privatization, beginning with new labor force entrants, again enters the national conversation.
- VIX averages 16 for the year and does not close above 30 on consecutive trading days.
- A Fortune 500 CEO is ousted in part due to the cover-up of a sex scandal.
- My monthly updates on momentum strategies (coming January 7th) become must-reads for asset allocators.
The amalgamation of these predictions would signal a solid performance for risky assets in 2013. A broad based consolidation in global economic growth supported by accommodative global central banks offsets the fiscal headwinds of continued austerity as developed markets seek longer-term sustainable ways forward. Normal disclaimers about the variability of outcomes always applies. Best wishes for a happy and prosperous 2013.