Stock Prices in 2012 Continued to "Climb a Wall of Worry" ... More Gains Forecast for 2013

When things are bad, people have a natural tendency to extrapolate the current situation into their vision of the future, even though it doesn't work that way. Investors frequently do that as well.

Another way of looking at the same thing, however, is that when things are bad, the likely future direction will be better. Of course, it's impossible to predict when the problems will be at their worst. But while nobody can pick the econmy's bottom, it's not all that difficult to foresee that improvement lies up ahead.

When the biggest issues du jour come into clear focus and become stabilized if not under absolute control, things will begin to get better. And then they will tend to keep getting better until the trend line is broken sometime down the road. The economic pendulum swings both ways but mostly to the good side of growth.

Inertia is a powerful force on both the downside and upside, and tomorrow is never an exact repeat of today. Over time our economy grows and as a result, corporate earnings will grow, too.

While the market is not a rigged game, it's always best to bet with the "house." And our American economic miracle of long term growth and prosperity has been in place for a few centuries now. Thus, it's a good bet that these current bad times too shall pass. In fact, they're passing right before our eyes now. And the inevitable good times will follow.

Accordingly, we shouldn't be surprised that stocks have done well the past couple of years even as economic conditions have remained weak. As the housing market has stabilized and household and consumer debts have been paid down, the financial condition of individuals has shown real improvement.

But now we can worry about the fiscal cliff that lies directly ahead. And after that we can worry about about how weak consumer spending will be, and how long will it take to bring the jobless rate down considerably. And what will happen in Europe and China, too. And so on.

As stock prices continue to gain while things look better down the road, that's what is called "climbing the wall of worry." And that's happening in the U.S. markets right now, as a matter of fact.

Are the good times over? Not at all. In my view, we've only just begun.

So now let's look at what this all may mean for the stock market in 2013 and the years after that.

Stocks the Best Investment for 2013 has the results of a just released survey of financial advisers:

"After a year heavy on pessimism, clouds are starting to part for the investment managers, analysts and executives counted among the ranks of chartered financial analysts.

U.S. stocks are the top investment pick in 2013 among the group, according to the CFA Institute's annual survey of investor opinion on the global outlook, released Monday.

The survey collected 7,000 responses from the institute's more-than-100,000 members. Half the group said equities would be the asset class posting the highest returns, and the U.S. was expected to be the best-performing global stocks market. Precious metals, the next favored category, garnered 22% of the votes.

Last year, 41% expected equities to be the best-performing asset class, nearly even with the percentage who expected commodities and precious metals to outperform. The Standard & Poor's 500-share index has handily outperformed gold this year, while oil prices have fallen.

"Things aren't great, but they're getting better," said Matt Orsagh, director of capital-markets policy with the institute. "People are getting a little bit more optimistic than they were the year before. We've had a good year in equities... so it's not surprising to find that."

Wall Street strategists also have become a bit more bullish. After apparently undershooting slightly with their projections for 2012 last year—they expected the Standard & Poor's 500-stock index to rise 7.1%, and it has advanced 12.8% through Friday—the group expects stocks to rise 9.1% from their current level by the end of 2013, according to data from Birinyi Associates.

Investors and strategists are saying the U.S. looks relatively strong globally, as Europe remains mired in debt and low growth and as emerging-market stocks struggle. Since the U.S. Federal Reserve has promised to keep interest rates low, investors don't expect rising yields on bonds anytime soon, either. And some speculate the underlying value of bonds also doesn't have much room to rise.

While giving U.S. stocks a vote of confidence, the analysts, investment managers and executives responding to the institute's survey remained cautious in their outlooks for growth. European economies are still slowing, and prospects for economic growth in China have been hotly debated.

Some 40% of respondents said they expect the global economy to grow, while 20% said they think it will contract and the remaining 40% either said they expect it to stay the same or they weren't sure. That reflects more optimism about 2013 than was expressed about 2012, when 34% said they expected the global economy to expand. The verdict it still out on whether the world's economy has grown this year.

Respondents' optimism about European and Middle Eastern economies reflected the biggest climb. Half of the analysts surveyed expect economies in Europe and the Middle East to grow, compared with 38% last year."

Summing Up

Stocks are up almost 13% this year and forecast to rise another 9% in 2013.

That's about what the historical annual average returns for equities have been for the past century. But it's even better that.

With inflation and interest rates at record lows, a double digit nominal return on stocks is most impressive in a world of low economic growth, 2% interest rates and minimal inflation.

A 20% return on stocks over 2 years is the equivalent of approximately 10 years on bonds at current 2% interest rates.

Those make for pretty good odds to choose owning stocks over bonds.

A 10% annual gain is 5 times greater than 2%.

The risk to reward ratio couldn't be much better than that.

Thanks. Bob.