Now that Washington has talked American investors down from the fiscal cliff, what will be the market's next obsession? And how might people invest for a new normal where tax rates have been decided, but everything from worldwide growth to the fate of Europe's economy remains in flux?
Stocks surged on the first day of the year in a global sigh of relief that the U.S. economy will not go over the precipice after Congress compromised on curtailing recession-threatening spending cuts (for now) and tax increases.
Now that we're over the cliff, what are the biggest worries for investors looking to make more than zero on their money? Here are five key questions and answers, from fund managers and analysts, that will matter in 2013.
1. Will the tech sector recover its sizzle? Put another way, will Apple, the Company Formerly Known as the World's Most Valuable, find its way back to favor with investors? Its products are still cherished by consumers, and it sits on the topmost shelf of global brand names. But it became a dark star for tech stocks last September as its falling price dragged the entire sector lower. A related question: Will investors ever embrace Facebook after its IPO flop?
[Read: Post-Cliff Financial Plans for 2013.]
Why it could be a problem: Apple (symbol: AAPL) and Facebook (FB) are important because even after their declines, they make up a large portion of the tech sector. Beyond that, Apple matters for the excitement it creates among consumers. Facebook is significant because it is seen as an indicator of whether social media can produce earnings growth to match the hype (and lofty stock prices). Clearly it is a time of transition in which both companies face challenges.
Investing solution: There is no doubt that mobile computing and social media are booming. But investors may need to take a broader view of tech stocks and invest in diversified tech funds, says Todd Rosenbluth, an ETF analyst at S&P Capital IQ. Two funds he cited were Technology Select Sector SPDR (XLK) and Vanguard Information Technology ETF (VGT). "What it does is give investors a chance to get exposure to all of those players instead of just making a bet on one," he adds. He thinks Apple (it's the largest holding in both funds) could be bargain-priced now after its 25 percent fall from a September peak above $700. Buying broader funds also gives investors a piece of solid tech stock like IBM (IBM), Microsoft (MSFT), QUALCOMM (QCOM), and Cisco (CSCO), "just a few of our favorites in a sector that could be set for a rebound," he says.
2. Is there a bond-market bubble? The fiscal cliff threatened to trim $500 billion to $1 trillion from U.S. growth. The next threat on that scale comes from the bond market. Investors have been avid buyers of U.S. debt and now hold $16 trillion worth. With prices at an all-time high and yields at an all-time low (prices are inverse to yield), some fear it is a massive bubble.
When it could be a problem: There will be a series of critical checkpoints for the bond market. One of the biggest tests could come as early as next month when Congress must decide whether to raise the debt ceiling to fund government operations. There are also eight Federal Reserve Open Market meetings this year and each will include a full review of the Fed strategy of keeping rates low, although recent decisions to keep rates very low until the jobless rate falls to 6.5 percent make sudden moves unlikely. Still, even tiny increases in interest rates could mean big risks for bond investors. "Rates are so low they are eventually going to have to go up and when they do, people are going to lose money in bond-market positions," says Hugh Johnson, chairman of Hugh Johnson Advisors. "It's very deep worry and it's got a bubble feeling." Rates should be stable and unthreatening this year, he says, but 2014 could be a year of reckoning.
Investing solution: It's a good time to look at your portfolio and make sure it is not overloaded with long-dated U.S. debt, especially in bond funds. If you own long-term government debt securities yielding 3 percent to 4 percent, you might consider selling them over the next year—or prepare to hold them to maturity as prices fall. Bond funds could be even riskier since the yield they pay fluctuates with the market—so there is not a true hold-to-the-bitter-end fixed payout option. Their value also falls as rates rise.