Fiscal Cliff: A huge policy blunder has been averted (for now), but fiscal tightening will take place. With additional negotiations to come, markets will be volatile, but long-term investors could find buying opportunities.
US Economy. The United States will maintain slow but positive growth, much like in 2012, but should not enter a new recession. Look for stronger growth as the year progresses.
Interest Rates and Inflation. The 10-year US Treasury yield should gradually rise through 2013 to 2.25%. Inflation should remain in the 2% range unless growth or oil prices spike.
Europe. The European Central Bank (EC B) changed the game by taking the risk of banking collapse off the table. But key reforms are likely a year or more away. In the meantime, growth is elusive.
China and Emerging Markets. China and emerging markets regain their growth trajectories in 2013, helping cushion any weaknesses in the United States and Europe.
Risk-On/Risk-Off Redux? Markets are likely to remain volatile early in the year, but should respond more to fundamentals as clarity emerges.
US Stock Market. While risks are elevated and valuations are relatively high, we still see opportunities, particularly in US mega caps.
Global Stocks. Emerging markets offer faster growth, cheap valuations, lower inflation and relatively muted volatility.
Fixed Income. What used to be “risk free” (i.e., Treasuries) has actually become risky. Over the long-term, we suggest migrating toward credit sectors.
High Yield Bonds. Investors should consider diversifying their exposures in high yield to include loans and secured credit. The asset class continues to offer compelling yield and return potential, and default rates remain low.
Municipal Bonds. Municipal bonds offer compelling taxable equivalent yields in the face of higher taxes. Munis are unlikely to lose their taxexempt status.
Volatility. Alternative asset classes and strategies are increasingly mainstream and offer the opportunity to enhance portfolio diversification.