Before we get to mentioning 2013, let's set the stage.
Tumult ruled in 2012, with flash crashes and mood swings in the stock market. The Federal Reserve kept a tight lid on interest rates. And investors flocked to dividend-paying stocks that far outshined Treasuries' paltry yield.
One bright spot: The Standard & Poor's 500 index notched double-digit returns.
For 2013, anemic U.S. economic growth is expected, while interest rates remain low and gross domestic product will grow by only 2% or so, says Chris Brown, chief investment officer for Pax World Funds in Boston.
As an antidote to uncertainty, Brown recommends sticking with big companies with good dividends. The key is getting high total returns -- stocks paying 3.5% dividends with good revenue growth. "Dividend raises will continue (this) year, too," Brown says. "These diversified companies will thrive since they're less sensitive to economic downturns."
But as you try to cherry-pick the stock market in 2013, you should avoid these less appealing stock choices when spending your money.
Retail is a Bad Bet in 2013
The retail business is cutthroat, says Charlie Smith, chief investment officer at Fort Pitt Capital Group in Pittsburgh. In this fashion-driven world, 20% of retailers are winners; the rest, losers. "When the odds are against you, it's a bad industry," Smith says.
Also, consumer spending will be sluggish in 2013, only up 1% or so, as consumers pare down debt, Smith says. That's bad news for retail firms, since consumer spending makes up two-thirds of the U.S. economy. "Consumers are rebuilding their balance sheets, so retail will be an even tougher business than usual," he says. Middle-market retailers will especially suffer, he says.
If you do hanker for retail stocks, Smith recommends buying auto stocks. Smith also likes high-end retail that can skate through skittish consumer spending, he says. Also, home improvement companies have consolidated their stores and have used their capital wisely. "Better managed stores that are profitable will do well," he says.
Utilities, Telecom Might Underperform
Dividend-hungry investors seeking safety snapped up utility companies in 2012. So going into 2013, electric and water utilities are overpriced, says John Blank, chief equity strategist at Zacks Investment Research, as utility company stock price-to-earnings, or PE, ratios hover near historic highs. This year, these utility sector stocks will underperform, he says.
Telecommunications stocks have the same overvalued dilemma, Blank says. As of mid-December, the bellwether S&P Telecom Select Industry Index had risen 11.5% in 2012. And, those companies' PE ratios are even higher than utilities.
"Big companies like Verizon and AT&T have had huge runs as everyone chases dividends," he says. Instead of utilities, investors who are looking for safe havens might do some research into health care stocks, Blank says. Or, they could plug into U.S. and China economic growth with technology or industrial stocks of companies that build infrastructure or sell materials worldwide.
Steer Away From Consumer Staples
Higher commodity prices roiled consumer staples in 2012. So, food processing companies have seen fast-rising costs, says Brown. Yet, companies that sell consumer staples can't immediately pass along price hikes to cost-conscious consumers. As a result, higher costs will hit these companies' bottom lines in 2013 and drag down profitability, Brown says. "And they've already had a good run," he says.
Higher commodity costs also will plague personal care companies, Brown says.
Instead, Brown likes consumer discretionary stocks, such as big auto companies. "Car sales have increased substantially," he says.
Brown also recommends furniture companies. "They're an indirect play on the housing rebound," he says.
Copyright 2013, Bankrate Inc.