The housing market is recovering from its collapse to such an extent that it will be one of the key drivers of the economy next year, and could add as much as 1 percentage point to growth, says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc.
A recovery in U.S. manufacturing, supported by better demand from emerging markets and improved consumer spending, will also contribute to growth. Those factors will be enough to counter the headwind of declining government spending.
There are several positives heading toward 2013. Confidence among U.S. homebuilders last month rose to its highest level in six and a half years. That's important because the housing sentiment index typically leads changes in the unemployment rate by about 15 months, Schwab estimates.
Also, stock valuations are reasonable, says Sonders. That, combined with the improving economy, should support stock markets next year.
Here are some excerpts from an interview with Sonders:
Q: What are the main themes investors should keep an eye on in 2013?
A: The economy has a couple of very important pockets of strength heading into the New Year. Housing is probably dominant among them, which I think really starts to feed into job growth and continues to feed into consumer confidence. Domestic energy obviously is a big story. The renewed competitiveness of U.S. manufacturing is a big story. So, all of those, I think start to support the economy and serve as pretty decent offsets to whatever the hit is from the "fiscal cliff."
Housing will be a bigger driver of improvement in the labor market in 2013 than has been the case. It's really just starting to kick in from a jobs perspective. The biggest job gains during the last up-cycle came from the housing bubble, in everything from construction to related industries, and that's starting to kick in again.
Q: What about the "fiscal cliff," the elephant in the room?
A: Clearly, the market is at the mercy of the negotiations. No question.
So, until the fiscal cliff is resolved, you're probably going to see some decent swings related to that, but I think the path of least resistance for the market remains up. You could get another meaningful push higher as more investors move back in, once some of this uncertainty has passed.
Let's assume it's not a total "can-kick," because that would mean that we're going to be talking about this and figuring out time frames and deadlines well into 2013, which I think would be a big problem. So, let's assume we get some sort of a definitive deal so that we get some resolution, whether it's a grand bargain — which is admittedly unlikely — or a partial "can-kick," via some actual guidelines as to what's going to happen. Then we can get back to the business of analyzing fundamentals.
Q: What is your favorite sector for next year?
A: Technology. We believe that we are still at the fairly early stages of digital technology and the smartphone revolution. In a growth-starved world, the need to continue to invest in productivity isn't going away.
Q: In the past you've said that the Federal Reserve may have done too much to boost the economy. What are your thoughts currently?
A: You certainly can't argue about their transparency. It's a question of whether we'll look back five years from now, or whatever it is, and say it was the right strategy. That chapter is yet to be written. Clarity is not a problem, the Fed is being very open with what its intentions are. And at this point there is no reason to think it is going to have to backtrack. But, it's got risks down the road.
My concern is about their eventual exit strategy, if, and when, inflation expectations do start to rise.
Q: Do you have any financial resolutions for next year?
A: I hope that we're going to get fundamental tax reform as part of any deal, and I hope that our tax code becomes simpler, rather than more complicated. That said, I think too many people try to figure out tax strategies on the own, and there is no better area of your financial health that probably could use advice or assistance than the tax side of things. My personal resolution is to get more detailed tax advice than I currently have been getting.