Kiplinger’s: What’s your outlook for stocks?
Nixon: We think it’s going to be a pretty decent year. Our outlook is predicated on slow but steady growth in the U.S., stability in China, and a short and shallow recession in the European Union. We see earnings growth of 5% to 10% next year. Pop on top of that a 2.1% dividend yield, and you’ve got a compelling argument for decent stock returns. And you know that with $1.7 trillion in cash on the balance sheets of S&P 500 companies, they’re spring-loaded either for a recovery in global demand or for some pretty shareholder-friendly activities, including initiating share buybacks and establishing or increasing dividends.
So where should investors focus in the coming year? Sectors that have done well are a little bit more defensive. Health care companies, for instance, deliver slow and steady growth, and investors are favoring that dependability and consistency.
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Will that continue in 2013? It probably will. A lot has to do with the fact that these tend to be companies that pay dividends. They pack a one-two punch of lower volatility and higher income.
What other themes are you emphasizing this year? We just increased our allocation to emerging markets, recognizing that the China growth story is intact. Right now, we’re overweighted in the U.S. and underweighted in stocks of developed foreign countries. Looking out 12 to 18 months, our middle-of-the-road portfolio has 11% of assets in emerging markets, 10% in international developed markets and 28% in U.S. stocks.
What about bonds? The best-case scenario in the high-grade fixed-income market right now is that you will earn what you get from clipping coupons. We are leaning toward high-yield bonds.
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