Heading into 2013 it is possible to make both a convincing bull and bear case. When I have felt strongly about the direction of the market I have not been afraid to communicate it here. This is not one of those times.
The bear case is that the current bull market is almost four years old, which is already longer than the average bull market. Taxes will be going up and its likely that there will be some spending cuts. This will create a fiscal drag on an economy that is already in slow growth mode. We are seeing slow growth around the world as well which increases the chance of an economic accident.
The bull case is that we have still not seen the euphoria phase of this bull market. Valuations remain reasonable and market participants stock allocations are on the conservative side. Corporate borrowing rates are at record lows yet we have not yet seen companies take full advantage of these rates. The level of cash M&A, LBOs and share repurchases have been on the low side considering where rates are. A buyout boom fueled by low rates is a real possibility. The fuel is there. Somebody just needs to light a match.
If the economy manages to stumble along investors are likely to be rewarded with a fifth year of this bull market. However, there are many risks out there that can tip us into a recession. My plan is to stick with companies that are less dependent on a strong economy, buy fear and sell euphoria.