Overall, Timothy Hopper, chief economist, TIAA-CREF, New York, said: “The economy is slowly getting better. It's not where we want it to be. It's not the kind of recovery we've wanted to have. But it is still moving in the right direction.
“We are positive on corporate earnings in 2013 and we think the effect of growth at the consumer level in the economy will provide that fundamental underpinning for earnings growth ... and for stock price appreciation.” Mr. Hopper said. “We are actually positive on market fundamentals, market prices and earnings next year.”
Mr. Paulsen ticked off bright signs in the “falling unemployment rate, increasing bank lending, rising housing prices, (and) a 4½-year high in consumer confidence.”
“My point is we just have so many more things working that weren't working,” Mr. Paulsen said. “It's a broader recovery right now than it's ever been ... Therefore it is much less vulnerable to external shocks. That's leading to high confidence, which will do even more for the growth rate in the coming year. I think that's underappreciated.”
What “we could get in the second half of (2013) could be the first major year of a start of a portfolio reallocation,” Mr. Paulsen said. “Maybe we will see the first movement toward equity funds and a drain from bond funds.”
Jim McDonald, senior vice president and chief investment strategist with Northern Trust Investments Inc., Chicago, expressed concern about getting too pessimistic, rigidly underweighting particular asset classes.
“When we think of risks, we all tend to fall into a trap (that) risks are only downside risks,” Mr. McDonald said.
But even asset classes to which he gives a negative outlook for 2013 have “a potential for an upside case,” Mr. McDonald said.
At Northern Trust, “we are careful about not getting too negative because you need to be in the market for times like 2012, when actually risk-taking has paid off and investors who have been too cautious have been left behind,” Mr. McDonald said.
Among forecasts for 2013:
- Mr. Hopper said the S&P 500 return “will be better” than in 2012. “Generally speaking the economy is getting stronger and so economic performance is going to be stronger in 2013 than 2012. Market performance is also going to be stronger in 2013 than 2012,” said Mr. Hopper, who didn't have a range.
- Mr. Paulsen said he expects the S&P 500 return “will be double digit” in 2013. “It's a matter of how much double digit,” he said. “I'm leaning toward a 1700 level. That would be a little over 20%” on price appreciation alone from early December. That rise would surpass the 1565.15 all-time high of the S&P 500, hit Oct. 9, 2007. “I think we're going to break that” in 2013, Mr. Paulsen said. The S&P 500 closed Jan. 2 at 1462.42.
- Mr. McDonald said, “We will see a high-single-digit kind of return out of U.S. equities, which will look good to developed markets counterparts.” But emerging markets will outperform both, he added.
- Mr. Shilling forecasts for 2013 the S&P 500 level falling to 800, a 40% decline that would be lessened a few percentage points by dividends.
Most strategists expressed cautious optimism.
“If you think about the fundamental categories in the economy, consumers, businesses, housing, the things that we need for growth are starting to percolate,” Mr. Hopper said. “It's not fantastic growth or even normal growth, but it's moving in the right direction.”
Mr. Hopper forecast a 2.2% growth in the gross domestic product in 2013. “You'll have slightly weaker growth in the first quarter and then progressively stronger growth” as the year continues, Mr. Hopper said.
The 2013 GDP growth sets up the economy for 2014 “where we no longer need the Fed” stimulus, Mr. Hopper said. “We think at the beginning of the year 2014, we can actually think about unwinding the Federal Reserve balance sheet, start shrinking it” and ultimately lead to rising interesting rates.
The 10-year Treasury yield for 2013 could rise to about 1.8% to 2%, from the early December 2012 rate of 1.6%, Mr. Hopper said.
He forecasts for 2013 a 2.3% inflation rate, measured by the consumer price index, in line with the end of 2012.
“The reason ... is there still is a lot of liquidity in the market and ... still is a lot of spare capacity in the industrial sector in the U.S. and, in fact, all around the world. And because of that there is very little pressure” on prices, Mr. Hopper said.