3 Market Predictions for 2013

As the holiday season quickly approaches, Jonas and I have been kicking around our market predictions for 2013.

It’s a great exercise that requires us to take a step back from our everyday analysis and dive deeper into big-picture ideas. That’s why today, I want you to try to move beyond the “fiscal cliff” news the media are currently shoving down your throat. Instead, I want to take a look at how investors could finally be getting rid of their 2008 financial crisis hangover — and what this might mean for stocks in the new year.

It all comes down to a few important trends everyone seems to be overlooking in favor of news about taxes and political bickering in D.C.

The trends I’m going to talk about revolve around investor sentiment. Shifts in sentiment — or how investors feel about their prospects — are key elements in sparking broad moves in the stock market.

I’m sure you know how pessimistic most people feel about the economy and the markets right now. But we’re seeing signs of this pessimism topping out. It’s a slow process. But when it plays out, we could see a strong, positive reaction from stocks.

Here are three ways it could all play out in 2013:

1. Fiscal cliff worries will eventually pass

While I don’t think all of the fiscal cliff talk will completely hold the market hostage this month, it could very well cause sharp (albeit very brief) swings in either direction.

It’s no secret that the media want to concoct doomsday scenarios surrounding the upcoming budget decisions. But I’m more inclined to think that a choppy market — not huge pushes higher or lower — could be the result over these next couple of weeks.

During times of uncertainty, things usually aren’t as bad as they seem — the same way that the outlook is never as rosy as advertised during a bull market. Once a firm decision is implemented (whether or not the investing public views it as positive or negative), we can move on other concerns…

Despite the parade of headlines, your best move is to ignore this noise completely. After all, your trading should be guided by price action — not political headlines.

2. The housing recovery will continue to inspire renewed market confidence

Over the past year, the housing market finally put in a bottom and is improving. House prices have stabilized in most areas, and even if we experience only marginal growth in housing starts and prices, consumers’ outlooks on their own worth and stability will improve.

For a vast majority of people in this country, their home is their biggest source of net worth by a large margin. If they don’t have to worry about a continued free fall in housing prices, they will feel better about their savings and their investments.

A stable housing market can remove some of this fear from the forefront of investors’ minds. It can also help boost other businesses and retail sectors, including appliances, home improvement retailers and even auto sales.

3. Consumer sentiment finally improves

You can already see the effects of the housing recovery on consumer sentiment numbers.

Consumer sentiment started to trend lower in 2000 as the dot-com bubble burst. Aside from a couple of insignificant recoveries, consumer sentiment has remained in a strong downtrend for the past 12 years. It wasn’t until earlier in 2012 that sentiment levels began to rise significantly from 2009 lows.

In October, we finally saw the first break of the sentiment downtrend that has remained intact for more than a decade…

So why is this break important?

Remember, despite the market’s rapid rise after the 2008 collapse, trading volume has yet to recover to pre-crisis levels. Frustrated with the market’s consistently terrible performance, retail investors packed up and left.

These shifting sentiment numbers show us that investors could be closer to embracing risk. If housing data and consumer sentiment numbers are any indication, we’re closer to a more stable recovery than you might think.

Now, I’m not saying the market will jump out of the gate in 2013 and not look back. But I do think we will see steadily improving conditions that will provide new opportunities.

If investors can ride out the fiscal cliff — and collectively decide to become more accepting of risk — we could finally see a gradual shift away from risk-averse investments like bonds and money finally returning to equities.

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3 Market Predictions for 2013 was originally featured in the Penny Sleuth.

This story was originally featured on Penny Sleuth.

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