‘‘The Fed has done everything it can do and is probably pretty close to having used its last bullet,’’ said Wright. ‘‘It’s been a good year for stocks, but we think that’s an artifact of monetary stimulus.’’
This year’s peaks in the Dow and the S&P 500 won’t be surpassed in 2013 and stocks may even slump in the first quarter, as investors lower their earnings expectations, Wright says. The money manager also says that any budget plan, regardless of the details, will be negative for stocks as it will involve higher taxes and lower government spending.
Wells Fargo Securities market analyst Gina Martin Adams also says companies will struggle in the first half of the year as the economy flirts with recession. Export growth is slowing and policymakers are struggling to come up with a plan to reduce the budget deficit.
The bank recommends that investors add to their holdings of financial and utilities stocks because low rates should help support steady earnings growth in the early part of the 2013. Financial stocks advanced 25 percent in 2012, making them the best performing industry group in the S&P 500. Utility stocks fell 3.4 percent, the worst performing of 10 industry groups in the index. The bank says investors should reduce their exposure to so-called consumer discretionary stocks, such as hotels and restaurant companies, because consumer spending will likely take a hit next year as taxes rise.
With a backdrop of historically low interest rates and an economy that still needs to address its fiscal imbalances, investors should remain realistic about the returns they are going to get from the stock market, says Darell Krassnoff, managing director at Bel Air Investment Advisors.
‘‘Things are getting better, not worse, but you have to have reasonable expectations,’’ Krassnoff says.