Doug Kass' 15 Surprises for 2013 « Market Montage

Noted hedge fund manager Doug Kass puts out his list of 15 surprises (not predictions) each year, and they are always an interesting read.  Much of it is unconventional and by design will have a relatively high failure rate but of course some do come true each year as well as the crowd is often wrong.   Unlike the turn of the year 2012 when most market participants were not very bullish (this was just as the ECB's LTRO was announced, Europe headed to recession, China mixed bag, U.S. potential slowdown etc), Kass feels the crowd is now quite bullish.  So he is taking the opposite side of that trade.  There are quite a few non economic / market predictions but I'll just highlight some of those that focus on that area as I am in general agreement especially regarding the lack of worry of the loss of the payroll tax holiday (and its multiplier effect), the "earnings cliff", the "age" of this market rally, et al.  That said it's worth a full read over at

As we enter 2013, investors and strategists are again grouped in a narrow consensus on economic growth (+2% real GDP), bond yields (higher) and year-end 2013 closing stock market price targets (on average at about 1575, a gain of 10%).

The Rationale Behind My Downbeat Surprises for 2013

  • No meaningful spending or entitlement cuts will be made;
  • Unsustainable and diminished value of fiscal and monetary policy;
  • An aging recovery and aging stock market;
  • Investment narrative shifts to the earnings cliff and to the end of profit margin expansion;
  • A market that starts the year at reasonable if not high valuations relative to headwinds;
  • Full-year estimated S&P 500 range of 1275-1480 with a close of 1425; and
  • Fade (sell/short) early January stock market strength.

As contrasted to 2012, when most were dour in market view (and wrong!), the 2013 consensus is an optimistic one and now holds to the view that European economic growth is stabilizing while growth in China and in the U.S. is reaccelerating. The popular view goes on to believe that even our dysfunctional leaders in Washington will not upset the growing consensus that it is clear sailing for equities and trouble ahead for bonds.

Once again, the bullish consensus is tightly grouped with the expectation that the S&P 500 will close the year at 1550-1615 (up from 1425 at the close of 2012) and that the 10 year U.S. note yield will trade at 2.50% or higher (up from 1.80% at the close of 2012).  These consensus views might prove too optimistic on stock prices and too pessimistic on bond prices. I believe that the U.S. stock market will make its 2013 high in the first two weeks of January, be in a yearlong range of 1275-1480 and close the year at 1425 and that the 10-year U.S. note will be below 2.00% in the first six months of 2013.

Many of my more downbeat surprises for 2013 are an outgrowth of an aging economic recovery (now four years old), a maturing stock market (of a similar age!) coupled with the recognition that running trillions of dollars in deficits while maintaining zero interest rates are unsustainable policy strategies.

I am also concerned that the multiplier being applied to the tax increases agreed to last week will be greater than many expect, serving to weigh on domestic economic growth.

The dependency on our economy and on business and consumer confidence to Washington's ability to compromise and deliver intelligent policy will prove, at the very least, unsettling to the markets in the year ahead. At worst, it will undermine the economic expansion. In addition, policy alternatives are diminishing. U.S. monetary policy is now effectively shooting blanks, and fiscal policy will now turn to be a drag on growth.

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio.