Market Commentary - 12.13.12

Four Issues to Focus on for 2013

As this year winds down and we head into the 2013, we believe four key issues will have the greatest impact on investment returns.

The fiscal cliff - Absent an agreement between the White House and Congress, on January 1st $600 billion in automatic tax increases and across-the-board spending cuts will occur in the midst of a still-weak economic recovery. The Congressional Budget Office (CBO) projects that the tax hikes and spending cuts would reduce the budget deficit, but at the cost of a recession in 2013. Analysts differ markedly on the probability of going over the fiscal cliff, however, we see some sort of agreement being reached in January, even if the country goes off the "fiscal cliff" temporarily. The consequences of not reaching an agreement are too costly.

Mixed recovery in spending – We believe a recovery in private spending, especially in the housing market, moderate growth in business investment, a reduced drag from the decline in government spending, and sustained growth in exports, add up to a year of moderate growth in 2013, with the potential for faster growth in the second half of the year. This outlook, of course, is contingent on an end to the uncertainty associated with the "fiscal cliff" early in the year.

Absence of inflation - Concerns that inflation would be re-ignited briefly arose in 2011 as commodity prices rose and headline consumer price inflation reached 3.8% in August of that year. Those concerns abated soon, however, when weakness in the global economy drove commodity prices down and headline inflation with it, to an annual rate of 2.2% in October of this year. Inflation is likely to remain low for some time to come because the economy is operating at substantially less than full employment.

Europe's debt crisis - A healthy Europe, with a population and aggregate GDP greater than that of the United States, is crucial to the economic well-being of the rest of the world. The Eurozone's biggest problem is getting through the transition to a fiscal stance that provides a more solid foundation for growth. Europe is in a recession that appears to be deepening, and the austerity needed to reduce the region's debt overhang makes it hard to achieve fiscal targets. Progress on resolving Europe's debt crisis is likely to require further bailouts of some of the heavily-indebted countries, more fiscal austerity, and — possibly — further debt reduction agreements. A consensus is building, meanwhile, that a long-term solution to Europe's crisis will require a fiscal union — with budgetary policies determined and enforced centrally — and a banking union to ensure uniform prudential supervision across the Eurozone. Agreement on a fiscal union is tantamount to forging a new constitution for a united Europe, which is unlikely to be a quick or smooth undertaking.

Looking past the "fiscal cliff," the global economic outlook today is one of slow but gradually improving growth. The massive monetary stimulus being provided by central banks around the world will, in our view and that of the consensus, eventually reflate the global economy. It is important to emphasize that adverse political and economic developments are still a possibility on both sides of the Atlantic. This is not the time to take on large, risky exposures, in our view. It warrants instead an asset allocation that will provide a substantial income cushion against volatility while benefiting from what we believe will be an improving economic climate in the year ahead.

To meet these goals for the year ahead we recommend an asset allocation that can be summarized as follows:

Within Equities: Overweight large-cap relative to small- and mid-cap stocks. Favor domestic to foreign stocks, growth over value stocks, and maintain a bias toward fundamental- and dividend- focused investments.

Within Fixed income: Overweight spread product relative to Treasuries, and bonds with lower duration than those with greater interest rate sensitivity.

Use Alternatives: Stay diversified in this asset class whose managers have the latitude to respond to a variety of market conditions.

This information compiled by Cetera Financial Group is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular news update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. This is not an offer, recommendation or solicitation of an offer to buy or sell any security and investment in any security covered in this material may not be advisable or suitable. Please consult your financial professional for more information.

While diversification may help reduce volatility and risk, it does not guarantee future performance. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

Multi-Financial Securities Corporation, its affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in the securities mentioned herein.