Stock Market Outlook 2013 - Market Authority

This is the time of the year to make preparations. Of course, prior to preparations, I must have a general feel of the markets. The only way to do this is to read up on market outlooks. This one, by John Thomas of Market Authority goes like this:


The 4 likely black swans
1) The Presidential Election. Most of Wall Street is hoping for a Romney win, but bracing themselves for an Obama one. No matter who wins, I expect a post-election surge in stock prices as a great mantel of uncertainty has been lifted from the markets. And as we all know, markets hate uncertainty.

2) The Fiscal Cliff. The media is ramping up their warnings of the dire impact of the "fiscal cliff" further scaring investors out of risk positions in everything from stocks to gold. The only real tangible impact of this "wolf crying" was to give a much-welcomed lower low in risk assets in October.


3) The Next European Quantitative Easing. Another round of monetary easing is due on the form of an additional "Long Term Refinancing Operation" or LTRO. The last one was for €500 billion, or $650 billion. Make that a double.

4) The New Year Reallocation Push. Add these annual flows to the positive developments outlined above, and you have the ingredients for a serious rise in stock prices. I think we could get as high as 1,600 for the S&P 500 in the first quarter of 2013.

This will however be the last 10% of a 140% move off of the March, 2009 low. This next ramp in share prices could be setting up us for the Greatest "Sell in May and go away" of all time. While president Obama may be puffing his chest out over one of the greatest stock market performances on record, he may well go down in history for "The Great Obama Crash of 2013."

Let me list the reasons why I expect a recession in 2013:

• The retirement of the baby boomer generation will continue to act as a drag on the economy for another decade, paring growth by 1%-2% a year.
  
• While the resolution of the fiscal cliff will be hailed as a great accomplishment, the bottom line is that a $4 trillion agreement will take 25% out of our GDP. 
    
• Look for Europe to remain in recession, adding more dead weight to corporate earnings here.
• Ditto for China, where a growth recession is delivering a serious blow to any company involved in the commodities sector, including steel, coal, iron ore, and copper. However, things may pick up after March 2013, after the leadership changes.
    
• While QE3 will give us a nice 4-6 month boost to asset prices, it can't do it forever. 
    
• We will enter the next recession with the highest unemployment rate in history, now 7.8%. .
  
• The year after a presidential election is always a great year to have a recession because it gives the ruling party three years to dig out before the next one.
  
• All of the gains in the stock market since June have been achieved through multiple expansion - from 12.7X to 14x today and 16X by March, Corporate earnings have actually been flat to falling during this time. Many companies are now hunkering down and reducing spending in expectation of a 2013 recession. This is why capital spending only reached half of the peak spending seen in the previous cycle.

If I am wrong with this analysis, the markets will bounce along sideways in an environment of falling volatility. That's why I am positioning myself with in-the-money calls spreads in order to profit from every possible scenario.

 

Recession 2013

 

All of this adds up to a big "R" for 2013, and share prices will no doubt reflect this. But I'm not looking for a major collapse a la 2008-2009, which saw a 53% plunge in the (SPX). I'm thinking more like a 25% to 37% pull back from a 1,600 top to no worse than 1,000. Those predicting Armageddon-like meltdown to 600, 300, or worse will be wrong by miles.

My reasoning is very simple. To get those huge, cataclysmic sell off of 500-800 Dow points a day you need to have a massive amount of leverage in the financial system. You had that six years ago, with equity hedge funds levered by 200% and bond funds betting the ranch with 1,000% or more long positions.

Conditions couldn't be any more different today. Hedge funds are typically running modest longs of 10%-20%. If they asked for 200% leverage, their prime brokers would probably tell them to go to hell and close their accounts. Morgan Stanley (MS) and Goldman Sachs (GS) are now running more bankerly 10X leverage. Individual stock investors have gone missing in action.

Biggest Buying Opportunity

Hopefully, it will be a short recession, maybe six months in duration, or only two back-to-back down quarters. After that, one of the biggest buying opportunities of the decade will set up for all asset classes. That will be the subject of a future report.