2013: You Don't Need a Weatherman
That may be for some, but that's not me.
I'm not a predictions guy, at least not at the granular level. This is, to a degree out of respect for the markets in the same way people tend to respect Mother Nature -- such a dynamic force really defies prediction. In my experience, predictions of Mother Nature and with the markets tend to lead to misery.
Economics are another story. Here I feel a little more comfortable about what the dismal science is saying regarding the prospects for 2013. The most recent read of the Chicago Fed National Activity Index shows the eighth consecutive reading below zero -- not good. The index is a weighted average of 85 indicators of national economic activity drawn from four categories of data: 1) production and income; 2) employment, unemployment and hours; 3) personal consumption and housing; and 4) sales, orders and inventories. Of the 85 variables measured, 54 of them made negative contributions. While one piece of data does not make a prediction, I take the CFNA index seriously because it's so broadly based.
For investors, it's important to act on facts and not on feelings. Feelings can enter the picture when there is uncertainty regarding an outcome, and unfortunately there are an unending string of uncertainties to distract us: First it was Europe . . . Then it was the importance of initiating a QE III strategy . . . then it was Europe . . . then it was the impending failure of QE III . . . now it's the fallout from riding merrily over the "fiscal cliff."
But the weakening of a broad base of economic indicators over the past eight months are the facts and I believe investors who heed them will be prepared for at least an economic slowdown at best during 2013 or and a recession at worst. Armed with this knowledge, what should investors do?
Pare down stock holdings of companies that have weak balance sheets. Levered balance sheets tend to be weak balance sheets, and a slowdown in business tends to impact levered companies disproportionately. This advice applies to mutual fund and ETF holdings too. Even looking at the balance sheets of the top 10 to 12 holdings alone will give you some indication of how exposed your holding are to a recessionary environment.
Go investment grade or go home. With respect to fixed-income investments -- that is, debt investments that generate a regular stream of income -- weaker companies stand to be hurt in a sluggish economic environment, resulting in possible bankruptcies or missed payments.