VOL. 127 | NO. 30 | Tuesday, February 14, 2012
The Worldly Investor
Invest Like It’s 2013
By David Waddell
The January Effect As each year closes, tax-savvy money managers purge their investment losers to harvest tax losses and window-dress year-end statements. With the turn of the calendar year, unloved names get repurchased, making last year’s losers suddenly this year’s winners.
Such has clearly been the case in 2012, as financials and material names dot the leader board after last year’s pummeling. At a higher level, January also offers information about the full trading year. January produced gains of 4.5 percent for the S&P 500.
Of the 12 months in the annual calendar, January has the best record for predicting year-end outcomes. Since 1915, a gain in January has predicted a year-end gain 76 percent of the time. The second best monthly prognosticator is February. An up February portends an up year 74 percent of the time.
Keeping the Drive Alive While historical statistics indicate that 2012 should be a positive year, that does not mean it won’t be a volatile one. Over the last 30 years, markets on average experience 14.5 percent pullbacks intra-year. Winning years always contain losing streaks. As we indicated last week, however, we believe that the economy may be re-accelerating after a mid-cycle slowdown. Companies will need the revenue opportunities associated with GDP growth, having nearly exhausted their cost cutting measures. Fortunately, the complex of recent economic data releases offers hope.
Last week we received positive consumer data with yet another improvement in job loss numbers and an uptick in consumer borrowing. Job growth will produce consumption growth and consumption growth will drive GDP higher. Higher GDP leads to higher corporate revenues, which filter through to higher earnings. This chain of events takes a while, so stocks advancing now do so on data we will receive 6 to 12 months from now. Currently, earnings in the S&P 500 have down-ticked sequentially for the first time since March 2009.
Estimates for 2012 call for earnings growth of 9 percent across the S&P 500. This compares with earnings growth of 15 percent for 2011 and 47 for 2010. Clearly, earnings momentum is slowing, but that’s often a lagging perspective for stock returns. Today, The Citigroup Global Economic Surprise Index stands near its highest level in the last 5 years, indicating current expectations might be too low, forcing several Wall Street analysts to increase growth forecasts for 2012.
Further out, the IMF recently forecasted that world GDP will grow 18 percent faster in 2013 than in 2012. Remember that GDP growth rates adjust for inflation. Corporate revenue calculations do not. A 3.5 percent global GDP growth rate, plus a 3 percent global inflation rate, equals a 6.5 percent global revenue growth environment. Add to that the slightest margin improvement, and earnings grow above long-term trend. With valuations reasonable in the US and cheap abroad, brighter economic prospects on the horizon translate into higher stock prices today.
That is the operating assumption underpinning the current rally. We may be living in 2012, but we are investing in 2013.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.