2013 Investment Outlook by Curtis Lyman

January 12, 2013 § Leave a comment

Current levels of the U.S. stock market volatility levels are trading at very low levels, indicating a high degree of investor complacency.  These levels of complacency are often an early warning of a sharp drop in stock market prices.  I believe that we could end 2013 with major U.S. stock market indexes at levels lower than when we entered 2013.  My thesis is based upon a belief that “modern day” economic models are unreliable because they were developed 40-50 years ago when beliefs about economic behaviors were much different.  A quick perusal of old text books will not find references to “austerity” or to “deleveraging.”  As a result, economists are “shooting in the dark” in the “new normal” economic environment.  The impact is that stock market corrections, which used to range in the 5-10% area are likely to be of a greater magnitude in 2013.

Whereas Central Banks could previously control economic growth and contraction by adjusting interest rates, since 2008, with interest rates so low, they are out of bullets when it comes to either stimulating an economy or slowing it down if it overheats.   As a result, inflation has risen to the top as a governor of economic growth.  Unlike interest rate cycles which are measured and controlled, commodity boom to bust cycles are far more volatile and with recent improvements in and the democratization of commodity market access, commodities are even more volatile.  Thus, increases in commodity prices which can rise or fall explosively can “tank” an economic recovery very quickly.

My thesis is that if the emerging markets, as a result of their central banks stimulating their economic growth over the past 18 months begin to really “take off” at the same time that our government is, by its unfettered borrowing to support spending, weakening the value of the U.S. Dollar which is also the commodity reference currency, we could witness a dramatic move up in commodity prices resulting in a stopping of the economic recovery that has been underway since 2009.  This would result in high inflation, a dramatic slowing of corporate earnings, and contracting price earnings multiples in the stock market if accompanied by a rise in interest rates and in the risk premium for stocks.

I believe that the stage is set.  Whether the actors will appear is the only question remaining to be answered.  A good indicator for this is housing and if we begin to see housing numbers deteriorate, we will be reducing our exposures to domestic stocks.

For more on this outlook, please visit our blog site at www.hightoweradvisors.com.

 

Curtis Lyman

Managing Director

 

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