To many politicians, the deal that raised taxes on the wealthy and averted the fiscal cliff was a sellout, a cop-out, a Band-Aid — in short, nothing good. And now the debt ceiling showdown is looming. So why have stock investors cheered, pushing the Standard & Poor’s 500-stock index to five-year highs?
My annual survey suggests that investment experts are cautiously upbeat about the economy and the stock market (but not bonds) for 2013, even though they acknowledge that political dysfunction in Washington poses risks. The tax deal may have upset Tea Party Republicans looking for big cuts in entitlement spending and liberals demanding even bigger tax increases on the wealthy. But investors seem to be taking the long view that the warring factions did in the end reach a deal, and it amounts to a $4 trillion stimulus compared with what would have happened if Congress had done nothing. Stimulus may be a bad word in Washington, but many investors seem to believe that continued deficit spending and only a modest tax increase will be good for the economy and corporate profits, at least this year.
The experts I consulted a year ago — Bill Miller for stocks, Bill Gross for bonds and Karl E. Case for real estate — proved accurate in their predictions for 2012. So I asked them for a return engagement. I also spoke to Byron Wien, vice chairman and a senior adviser at Blackstone. Last year, Mr. Wien was one of the few pundits who was exactly right about the stock market, predicting that the S.& P. 500 would close the year “over 1400.” The index ended the year at 1426, a gain of 13.4 percent for the year.
Bill Miller: ‘The great bond bear market has begun’
Perhaps the biggest comeback of 2012 belongs to Mr. Miller of Legg Mason, who became a mutual fund legend by beating the S.& P. 500 for 15 consecutive years, from 1991 to 2005. Then, during 2008 and the financial panic, he seemingly lost his magic touch. His fund plunged 55 percent. The Wall Street Journal, in its headline about the fund’s dismal returns, spoke of his “defeat.” And after another disappointing year in 2011, he retired as head of the Legg Mason Value Trust, the firm’s flagship fund.
But Mr. Miller kept his hand in the market, managing the much smaller Legg Mason Capital Management Opportunity Trust. When I sought him out a year ago, reasoning that even the most brilliant investors can be expected to have a few bad years, he was bullish on stocks. That proved good advice. Mr. Miller’s fund gained over 40 percent in 2012, and was top-performing mutual fund in Morningstar’s database. How did he do it?
Mr. Miller made big bets on the battered and out-of-favor home building and financial sectors, the kind of contrarian strategy that served Mr. Miller well for so many years. Major holdings like Pulte Homes (which gained 160 percent over the past year) and Bank of America (which nearly doubled) were some his best-performing stocks.
Mr. Miller remains optimistic about stocks for 2013, with an asterisk. When I reached him this week, he offered these predictions: “The great bond bear market has begun, starting with Treasuries, which should see years of losses as interest rates gradually normalize. Equities, which outperformed bonds in 2012, will continue to do well, driven by rising earnings, strong free cash flow, solid profit margins, low inflation and attractive valuation relative to bonds. The path of least resistance for stocks and the economy is higher. The chief risk is the dysfunctional political environment, which could derail what otherwise is a very promising outlook.”
Mr. Wien, whose long career on Wall Street included stints at Morgan Stanley and Pequot Capital, told me he’s “gloomy” about prospects in Washington. “We can’t solve our problems simply by getting the rich to pay more. We have to broaden the tax base, revise the tax code and tackle the structural problems we aren’t facing. We need to deal with entitlements. The latest deal did absolutely nothing to address that. I don’t know if democracy can solve these problems.”
Despite his success at predicting the market last year, Mr. Wien isn’t putting a number on the S.& P. 500 this year, but his expectations are modest. He expects the S.& P. 500 to test 1300 at some point, which would be about a 10 percent decline from current levels, before ending the year about where it is now. “I don’t expect the stock market to do much this year,” he said. “Most analysts are forecasting returns of 10 percent or more, but I think earnings could be down for the year, which would make it hard for the market to gain that much.”
But he’s optimistic about stock markets in some other countries, especially China, where stocks lagged last year, and Japan, which has been in the doldrums for years. He’s forecasting a 20 percent gain this year for Chinese shares.
Bill Gross: ‘Ashes in our stocking’
