Many strategists now have a pretty rosy outlook for the markets in general over the next year following the recovery in Chinese growth in the 4th quarter.  In terms of stock sectors, there seems to be a preference for cyclical industries like technology, industrials, basic materials and consumer discretionary, and that is certainly where our own bias is.  We would also add the resource sector into that mix, particularly the Basic Materials and Energy sectors in Canada, which have lagged the overall markets for the fast seven quarters.  Our investment strategy going into 2013 remains biased towards stocks.  One of the keys that we have been looking for to confirm the recent strength in equities has been higher bond yields. Whether it was the more ‘hawkish’ tone out of the US Fed minutes released on Jan. 3rd or the gradually improving economy, 10‐year yields broke through the important 1.90% level finally, providing further support to the rally in stocks.  Our Asset Mix Indicator, which we use to allocate funds between stocks, bonds and cash within our balanced funds, remains at the very bullish level of +5.  The only higher readings we had on this indicator were at the market lows of October 2011, August 2010 and March 2009.

Asset Mix Indicator

The Monetary Conditions indicator is the one most likely to decline over the year as the central banks most likely start to remove the excess monetary stimulus from the markets.  But this will only occur if the economic data continues to improve, which would lend further support to the Economic Growth and Corporate Profit indicators.  While most years see the stock market having a strong move in the first week, we believe that the rest of 2013 will also play more favourably towards stocks and away from bonds.

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