3. What happens in the rest of the world? Everyone has been focusing on Washington's budget crisis for much of the past year and a half. Attention is now likely to turn back to trouble spots in the world at large. European stocks rallied last year, but Europe is far from solving its towering debt issues. China, though, is back on a growth track after more than a year of pulling back on economic stimulus to slow inflation.
The export problem: U.S. export sales dipped during the recession and have remained under pressure. Rising commodity costs have curbed the appetite for American farm produce, usually one of the steadiest exports. Higher-end products from computers to jets have lagged as world economic growth stagnated.
Investing solution: Global stocks are not cheap after a solid year. But since half the profit of major U.S. companies is derived from abroad, investing in U.S. equity provides plenty of foreign exposure. "International stocks have been doing better for a while," says Johnson. But as investors become willing to take on more risk, that global rally could fan out to include "small and midsized companies" that have been left out.
4. How solid is the housing recovery? Look for housing sales and prices, especially the S&P Schiller index, to become a bigger focus again as investors try to gauge the staying power of a recovery that gained momentum last year. Housing always has a large direct impact on the economy—more so since the housing collapse of five years ago destroyed consumer confidence and reversed the feel-good "wealth effect" of home equity.
One problem: The big recovery seen in the past year could dissipate if job growth remains tepid. "The housing and jobs markets are improving in the U.S., but only modestly," says David Edwards, president of Heron Capital Management, Inc.
Investing solution: In the wake of big gains in real estate investment trusts (REITs) and other direct housing investments over the past three years, investors might be better off looking at the consumer and housing-related sectors that have not recovered as fully.
5. Why are industrials attractive now? Nothing is ever fail-safe when it comes to investing. And industrials are notoriously volatile. But there is wide consensus that this sector is more promising than most others in a strengthening global economy. A weaker dollar makes U.S. industrial goods more competitive and translates directly to higher earnings from other, stronger currencies. Even so, businesses are still reluctant to invest in capital goods until they see clearer end-user demand from consumers.
Investing solution: A pure equity play focused on larger industrials is the safest, partly because the cash-rich companies can pay dividends and support shares through stock buybacks and get a lift from foreign earnings and a weak dollar. Says S&P's Rosenbluth: "We see economic growth improving now that the first level of the cliff is resolved and more cyclicals like industrials and consumer discretionary stocks will do well in this kind of environment." The defensive stocks—utilities, consumer staples—will lag, he adds. "People pulled back on the risk at the end of 2012," says Rosenbluth. Now it's back on—until the next cliff approaches.