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Happy New Year?

January 3, 2013

Just about any way you cut it, 2012 was a great year for the stock market. The S&P 500 Index finished up more than 13%. Tack on a couple of percentage points for dividends, and total return last year for this broad measure of stock market performance was nearly 16%. A very impressive year indeed and in line with our expectations.

-Scott Wren, senior equity strategist, Wells Fargo

But last year is history. We need to look ahead to the New Year. Based on the the results of the “fiscal cliff” negotiations, taxes are going up on everybody that holds a job since the Social Security payroll tax returns to the previous 6.2% rate from last year’s 4.2%. So the vast majority of Americans will see less money in their paychecks this year, all else being equal. Any decisions involving potential spending cuts have been put off for two months. We do not believe the effects on the economy will be substantial at this point but the debate on the debt ceiling promises to be quite contentious. Economic growth should continue to be modest. It appears most of the effects of the cliff have been avoided.

Investors are in celebration mode at the time of this writing and that makes sense. While our longer term debt and deficit issues were not addressed in this round of negotiations, the stock market usually gets back to focusing on the near term rather quickly. With tax increases somewhat minimal and spending cuts unlikely to be drastic this year, the headwinds for the economy could have been much worse. Look at the move in the market on the first trading day of 2013 as mostly a relief rally.

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