By John Wasik
CHICAGO Dec 10 Let's assume, for a moment, that
the "fiscal cliff" bears are wrong.
Underlying pending tax increases and more debt-ceiling
battles is some fairly positive economic news. Job growth
surprisingly soared last month and U.S. home prices in October
posted their biggest increase in six years, according to
CoreLogic. Factory orders also rose unexpectedly during the
month. And the Federal Reserve's stimulus policy is keeping
mortgage rates low.
That all bodes well for a low-growth, sustainable recovery
in which basic materials, industrials, emerging markets and even
utilities regain favor. The upswing in employment and personal
income will translate into a substantial consumer wealth effect,
and more people will be spending money on homes, autos,
appliances and consumer goods. Overseas, the rising U.S. tide
will lift emerging markets. Renewed confidence combined with
secular economic growth represents "a likely catalyst for the
next multi-year bull market," notes the BMO Private Bank 2013
outlook for financial markets.
A good-news approach sounds oddly like a contrarian view
when Washington produces nothing but sour headlines, but it's
the logical outcome of the fiscal cliff issues being worked out.
While a sustained bull market may be a tall order in the
face of U.S. growth consensus predictions remaining under 3
percent, it's not out of the question if consumer demand,
employment and housing continue on an upward trend. Here are
some positions you should consider:
MEGA-CAP U.S. STOCKS
Continued strong earnings will boost big companies in 2013.
The best way to capture returns of the mega-caps is to hold an
ultra-cheap index fund such as the Schwab S&P 500 fund
or the Fidelity Spartan 500 Index Advantage. Both have
expense ratios -- what managers charge you for holding the fund
-- of under 0.10 percent annually. These funds should be core
holdings in most long-term portfolios.
THE SOWS OF THE S&P 500
The "Dogs of the Dow" strategy involves picking the
poorest-performing stocks in the index in the current year and
holding them into the next. My variation is the "Sows of the
S&P," which is the same method, only picking the
worst-performing major S&P sectors of 2012 and buying ETFs that
The idea is that, due to institutional sector rotation when
groups of stocks fall in and out of favor by the market's
biggest players, you're buying the cheapest stocks when they are
low and gain appreciation when they rebound. Employing that
reasoning in 2013 will put your dollars into the
worst-performing sectors in this current year -- utilities,
energy and materials. Consider the Utilities Select Sector SPDR
, the iShares S&P Global Energy Sector fund and
the Vanguard Materials ETF.
Although developing countries have been behind the curve in
recent years, they will benefit the most from growing population
and prosperity. According to GMO, a Boston-based money
management firm, emerging markets stocks are forecast to grow
6.3 percent annually over the next seven years, compared to 4.8
percent for U.S. high-quality stocks. Two worthy choices in this
arena are the iShares MSCI Emerging Markets Minimum Volatility
Index or the Vanguard MSCI Emerging Markets ETF
While you're increasing your exposure to large, global
dividend-paying stocks, it's time to take at look at your
portfolio's exposure to long- and medium-term bonds. If you have
substantial holdings in bond funds with more than five-year
maturities, it's time to consider shorter-term bonds. Expanding
economies typically translate into higher interest rates, which
hurts bond prices.
Although I'm fairly optimistic about the economic recovery
continuing apace, it always makes sense to have 2008 firmly in
your rear-view mirror. Nothing is guaranteed these days and
volatility is often your enemy. That's why it's also time to do
some risk budgeting in your portfolio.
I'm hoping that earlier in the year you either drafted or
reviewed an investment policy statement that puts in writing how
much risk you want to take and an appropriate percentage mix in
stocks, bonds and alternatives. If not, now's a good time to
draft one to put in writing where you want to be and how much
risk you want to take to get there.