What Will 2013 Bring?

As if we didn’t have enough to worry about; elections and the economy going into 2013 and a possible change in federal government!

So off I went last week to join upwards of 100 other Rockfordians to a breakfast meeting sponsored by Riverside Community Bank and listened to 2 Investment Officers that consult for them.  The second speaker, Andrew Douglass, CFA, and SVP-Chief Investment Officer of Wealth Advisory Services, presented the economic and market forecast for the coming year.

Yes there are dangers coming; the “fiscal cliff” being the biggest and as yet uncertain as to outcome.  This “cliff” includes the expiration of the Bush Tax cuts, the end of the 2% reduction in payroll tax, sequestration which is the automatic spending cuts and the elimination of emergency unemployment benefits.

While the economy is somewhat growing at just under 2%, the impact of the “cliff” would be a reduction of 4% to GDP or a net of a 2% shrinkage in the economy.

What does Douglass think will happen?  Congress will “punt” the decision into 2013 and extend the “deadline” by 3-6 months. The election next week will have a significant impact on the ultimate resolution but he thinks we could expect a 1% – 1.5% drag in fiscal policy in 2013.

There are some bright spots in the economy.  Housing prices have bottomed and inventories are reaching pre-bubble levels.  The auto sector continues to see increasing demand and average age of the US fleet has grown from 6 to 9+ years.

His predictions for 2013?  Expect GDP growth at 1.75% – 2.25%; Core Inflation from 1.25% – 1.50%; Unemployment Rate from 7.5% – 8.00%; Stock Market Returns from 8.00% – 10.00% and Bond Market Returns from -0.5% to 1.50%.

Do we expect to see rapid fire changes in fiscal policy?  My observation says that it probably doesn’t matter who gets elected President.  If he is faced with an expected split Congress, not much may really happen.  So I think we will enter 2013 with uncertainty in the economy until somehow these fiscal issues get resolved.