There are a lot of things that could go right in 2013, and since you may not be hearing about them as much as you should, I want to make sure we give them adequate respect. Here they are, in no particular order:
The United States' Housing Recovery, which has only just begun, takes firmer hold
The US housing market suffered a significant setback starting in 2007, and a virtual collapse of the global economy followed soon thereafter. Now, more than five years later, housing and its close cousin the US banking sector are on the verge of something we never thought we'd see again - profitability. It feels like it has been so long since they were anything but the punchline to a joke. Perhaps the very thing that led us into the morass could be what leads us out.
Take a look at the SPDR Select Financial Sector ETF (NYSEARCA:XLF) and Wells Fargo (NYSE:WFC) for broad-based exposure to the recovery, or, for those with more intestinal fortitude - Bank of America (NYSE:BAC), whose price has had disaster built into it for years. Imagine what they can do when rates creep up and they can reinstate a meaningful dividend.
Low interest rates continue to accelerate the transition from debt to equity
Ben Bernanke has all but filled out your refinance paperwork for you and called you at home to steer you away from money markets, CDs and long-term bonds. Because these investments are no longer even covering the costs of inflation, there is very little left enticing retail or institutional investors into the bond market, especially US Treasuries. For at least two years investment professionals have warned of the "Great Rotation" - when hundreds of billions, if not trillions, of dollars migrate from bonds (debt) to stocks (equity). It is my belief that this transition is already underway.
The chart above demonstrates graphically the thirty-year bull market that I feel has already ended for US bonds, as interest rates have fallen steadily on our benchmark 10- and 30-Year Treasury. Remember, bond prices and yields are inversely correlated. Unlike Grover Norquist's stance on tax rates, interest rates can move in either direction.
Take a look at the Index for Master Limited Partnerships (NYSEARCA:AMJ) for an investment with sustainable yield above Treasury Bonds. The companies that make up this index have predictable cash flows, manageable cost of capital through both equity and debt offerings, and grow their distributions over time (which can drive share prices higher as yield spreads above the 10-year Treasury widen). Specifically, we like Enterprise Product Partners (NYSE:EPD), Kinder Morgan Energy Partners (NYSE:KMP), Targa Resources Partners (NYSE:NGLS), and Williams Partners (NYSE:WPZ).
A wealthier consumer continues to increase spending
Another side effect of low interest rates is an increase in spending. Consumers don't see much value in their savings accounts, and those fortunate enough to refinance have more disposable income due to lower mortgage payments. The positive impact of a 25% (or in some cases, much more) decrease in monthly mortgage payments more than makes up for the recent increase in income taxes. And don't forget the "wealth effect" larger 401k balances have on people.
Freshly extinguished flames in Europe lead to stock market bounce on the other side of the pond
Like the Cleveland Indians in the movie Major League (one of my all-time favorites), European stocks are "threatening to climb out of the cellar." Our own political sideshow has derailed the media from focusing on European turmoil for a few months, but let me assure you it has not gone away. That being said, I feel the bottom is behind us, and it may have been 18 months ago. Remember that the stock market is a leading indicator, meaning the economy's health generally tends to lag the stock market by anywhere from six to twelve months. Below is a chart of the European stock index over the past two years.
Even a partial deployment of the trillions sitting on US Corporations' balance sheets leads to record stock buybacks and improved EPS (earnings per share)
When a company orchestrates a stock buyback they are effectively reducing the number of outstanding shares (by purchasing shares owned by the public). Fewer outstanding shares means higher EPS (earnings per share) which, in turn, means a more favorable P/E (price to earnings-per-share) ratio. Additionally, buybacks are more tax-efficient for the investors/shareholders than when a company issues or raises its dividend. So, in theory, corporations may be waiting for dividends to become less attractive (due to the not-so-dramatic-but-still-noticeable increase in dividend tax rates) to initiate this alternate form of returning capital to shareholders.
United States Energy Independence
You may have heard a thing or two about this, but you probably treated it with a little "boy who cried wolf" disinterest. However, there is actual evidence to support this movement. We are drilling and refining for oil and natural gas at record rates here in the United States, meeting an overwhelming majority of our own energy needs. In addition, we are producing natural gas at a per barrel rate that is far less expensive than the commodity costs in just about every other part of the world. There is a real economic opportunity here.
This is another reason to like Master Limited Partnerships right now. The infrastructure is largely in place already, but think about the potential for increasing volumes and cash flows amongst the well-positioned companies mentioned above.
Investors recognize that, while we currently stand close to all-time highs on major benchmark stock indexes, investment returns over the previous 5-, 10-, and 15-year periods are well below historical averages
Do you know anyone who has "never made any money in the stock market?" I do. They are typically stubborn folks who insist that the market is rigged and/or they have terrible luck. They also tend to make very poor, overly emotional decisions. The US stock market has returned over 10% per year, on average, over the past 100 years. That time period has shown us wars, inflation, depression, recession, gas crises and amazing advances in transportation and technology. What has happened over the past five years has done nothing to disrupt that trend, in my view.
Over the past 5-, 10- and 15-year periods the stock market (S&P 500) has returned 12.44%, 81.81%, and 48.80%* respectively in cumulative (not annualized) terms. To put things in perspective, Apple's stock is up more in the past three years than the S&P over the past fifteen. I believe that a reversion to the mean is inevitable. I believe the US recovery has only started on paper, but is much stronger than we can see or feel yet. Like our housing market recovery, "The way I see it, we've only just begun…."
* Through market close Feb 8, 2013.
Disclosure: I am long BAC, AMJ, EPD, KMP, NGLS, WPZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.