1. Stick with 2011’s winners
Buy what’s worked and head for the beach? Not quite. But many of the
headwinds investors fought in 2011 haven’t disappeared and could worsen,
which means that some of last year’s winners could repeat.
Geopolitical and economic risks will, as always, impact financial
markets and consumer prices short-term, with accompanying high
volatility. Yet broadly speaking, in the current anemic global climate,
where economic growth is increasingly scarce, pressure on interest rates
and inflation isn’t much of an immediate threat.
U.S. stocks trounced their international counterparts, and look to do so
again in 2012. Large-caps outperformed small- and midcaps, and
growth-stock investors bested more bargain-minded value buyers. Expect
more of that as well.
The hunt for yield is another priority. The Dogs of the Dow perform in
volatile, tug-of-war markets and seem poised for another round. The 2012
Dogs are unchanged from 2011 except Procter & Gamble Co.
PG
-0.64%
has replaced McDonald’s Corp.
MCD
+0.59%
. AT&T Inc.
T
-1.65%
is again the highest-yielding Dow component.
Bull markets, past and present: Is the rally over?
MarketWatch columnist Mark Hulbert notes that the U.S. bull market
has run much longer than others in history — and that might suggest
it's run its course. Interview with Laura Mandaro. Photo: Getty Images.
In a slow-growth world where developed nations are deleveraging — much
of Europe is likely to be mired in recession this year and the U.S. will
be lucky if growth nears 2% — expect bond yields to remain low.
The riskiest play is long-term Treasurys. If the 30-year Treasury yield
slides to 2% or 2.5% — perhaps in a euro-sparked panic — that probably
would be the last gasp of the Treasury bond bull. Still, investors would
win big on a total return basis, though not as much as in 2011.
As an alternative to volatile long- and intermediate-term Treasurys,
consider high-quality corporate bonds, municipal bonds and
income-producing stocks.
2. Own defensive stocks in a deleveraging age
Focus on capital preservation and the preservation of cash flow.
From a stock perspective, the classic defensive sectors include yield-rich consumer staples, health care and utilities.
Among these three, only the consumer-staples sector gets an enthusiastic
nod from analysts at S&P Capital IQ. Utilities, especially shares
of electric companies, enjoyed a tremendous run in 2011, up 14.5%. And
while these companies offer hefty dividends, valuations have increased
considerably and the S&P analysts expect market performance from the
group in 2012. The analysts are also neutral about the health-care
sector, which gained 10.2% last year.
3. Add some economic sensitivity
“A balanced sector approach that emphasizes both cyclical and defensive
themes is critical to navigating this manic market,” said Alec Young,
global equity strategist at S&P Capital IQ, in a recent research
report.
That means you have to temper the urge for flight and beef up the
portfolio with some fight. Put some money into cyclical sectors that
lagged in 2011, including materials, industrials, energy and
technology.
“Some of the beaten-down cyclical groups will come back,” said Doug
Ramsey, chief investment officer at mutual fund firm Leuthold Group.
Topping his list: shares of railroads, chemicals, industrials and
materials.
4. Stick with dividend-paying growth stocks
U.S. corporate balance sheets — the fundamentals — are in excellent
shape overall. Still, in a slow-growth climate the advantage goes to the
best of the best. These companies tend to be found in areas that are
less economically sensitive. They’re typically large-caps, with a “wide
moat” of business, strong cash flow and a history of using capital for
productive purposes including acquisitions, share buybacks and regularly
higher dividend payments.
“Gravitate more to the income-oriented sectors of the U.S. market for
the time being,” said David Rosenberg, chief economist and strategist at
Toronto-based investment manager Gluskin Sheff + Associates, in a
recent research report.
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