By John Wasik
CHICAGO, Dec 10 (Reuters) - Let's assume, for a moment, that the "fiscal cliff" bears are wrong.
Underlying pending tax increases and more debt-ceiling battles is some fairly positive economic news. Job growth surprisingly soared last month and U.S. home prices in October posted their biggest increase in six years, according to CoreLogic. Factory orders also rose unexpectedly during the month. And the Federal Reserve's stimulus policy is keeping mortgage rates low.
That all bodes well for a low-growth, sustainable recovery in which basic materials, industrials, emerging markets and even utilities regain favor. The upswing in employment and personal income will translate into a substantial consumer wealth effect, and more people will be spending money on homes, autos, appliances and consumer goods. Overseas, the rising U.S. tide will lift emerging markets. Renewed confidence combined with secular economic growth represents "a likely catalyst for the next multi-year bull market," notes the BMO Private Bank 2013 outlook for financial markets.
A good-news approach sounds oddly like a contrarian view when Washington produces nothing but sour headlines, but it's the logical outcome of the fiscal cliff issues being worked out.
While a sustained bull market may be a tall order in the face of U.S. growth consensus predictions remaining under 3 percent, it's not out of the question if consumer demand, employment and housing continue on an upward trend. Here are some positions you should consider:
Continued strong earnings will boost big companies in 2013. The best way to capture returns of the mega-caps is to hold an ultra-cheap index fund such as the Schwab S&P 500 fund or the Fidelity Spartan 500 Index Advantage. Both have expense ratios -- what managers charge you for holding the fund -- of under 0.10 percent annually. These funds should be core holdings in most long-term portfolios.
The "Dogs of the Dow" strategy involves picking the poorest-performing stocks in the index in the current year and holding them into the next. My variation is the "Sows of the S&P," which is the same method, only picking the worst-performing major S&P sectors of 2012 and buying ETFs that approximate them.
The idea is that, due to institutional sector rotation when groups of stocks fall in and out of favor by the market's biggest players, you're buying the cheapest stocks when they are low and gain appreciation when they rebound. Employing that reasoning in 2013 will put your dollars into the worst-performing sectors in this current year -- utilities, energy and materials. Consider the Utilities Select Sector SPDR , the iShares S&P Global Energy Sector fund and the Vanguard Materials ETF.
Although developing countries have been behind the curve in recent years, they will benefit the most from growing population and prosperity. According to GMO, a Boston-based money management firm, emerging markets stocks are forecast to grow 6.3 percent annually over the next seven years, compared to 4.8 percent for U.S. high-quality stocks. Two worthy choices in this arena are the iShares MSCI Emerging Markets Minimum Volatility Index or the Vanguard MSCI Emerging Markets ETF .
While you're increasing your exposure to large, global dividend-paying stocks, it's time to take at look at your portfolio's exposure to long- and medium-term bonds. If you have substantial holdings in bond funds with more than five-year maturities, it's time to consider shorter-term bonds. Expanding economies typically translate into higher interest rates, which hurts bond prices.
Although I'm fairly optimistic about the economic recovery continuing apace, it always makes sense to have 2008 firmly in your rear-view mirror. Nothing is guaranteed these days and volatility is often your enemy. That's why it's also time to do some risk budgeting in your portfolio.
I'm hoping that earlier in the year you either drafted or reviewed an investment policy statement that puts in writing how much risk you want to take and an appropriate percentage mix in stocks, bonds and alternatives. If not, now's a good time to draft one to put in writing where you want to be and how much risk you want to take to get there.