6 Reasons the Stock Market Could Do Surprisingly Well in 2013

“The S&P 500 hit a five-year high last week, and now some experts are saying that stocks are overpriced and that the overall market is vulnerable to a 20% drop this year. There are certainly plenty of things to worry about, from a lousy economy and political gridlock in Washington to the possibility of a financial crisis in the euro zone. But there’s an equally compelling case that stocks could do quite well in 2013. Indeed, it wouldn’t be hard for the Dow to sail through its all-time high of 14,164 and go on to top 15,000 before the year is out – a gain of 10% or more from current levels.

There’s no denying the economy’s current problems. Since the recession ended more than three years ago, growth has been consistently disappointing for a recovery. Moreover, the economy has actually been slowing down recently – from a 3.1% annualized growth rate in last year’s third quarter to less than 1.5% in the fourth quarter. In addition, analysts project that the fiscal cliff deal, combined with attempts to cut the deficit, will knock as much as a full percentage point off GDP growth in 2013. In short, this year’s economy figures to be just as sluggish as last year’s – and maybe worse.

But the pessimists’ case for a bear market is based on more than a limping U.S. economy. They think the bull market – up more than 100% over the past three-and-a-half years – has run its course. They expect a global slowdown that will cause 2013 corporate profits to fall short of expectations. Finally, they think the Federal Reserve’s extreme easy-money policies will either lead to inflation, or that the Fed will have to raise interest rates. Either way, it would send the prices of Treasury bonds into a tailspin and unsettle the stock market as well.

Whew! That’s a lot to worry about. But today’s bearish commentators are making one crucial incorrect assumption – that share prices move in lockstep with the economy. It’s true that over the long term, share prices follow corporate profits and that corporate profits reflect the economy. But that relationship doesn’t necessarily hold in the short run. Here are six reasons to question the gloomy outlook…”

Full article