Tail risks come to an end

Stocktake:That was 2012. In 2013 and beyond, according to Merrill Lynch's Michael Hartnett, it will be the era when tail risks come to an end.

Macro developments have dominated markets since 2008, with individual stocks rising and falling almost in unison following central bank decisions, European developments, currency moves and so on.

Now, however, the correlations of all S&P 500 stock combinations have fallen to 30 per cent, down from 2011’s 70 per cent high.

Finally, said Hartnett, “we are close to being in a differentiated/stock picker’s market”.

Presidential cycle kicks in

Exuberance regarding the avoidance of the fiscal cliff saw the Dow Jones Industrial Average record both its best ever New Year’s Eve performance as well as its best start to a new trading year.

History suggests, however, limited gains in 2013. Why? The so-called presidential cycle. Since 1833, according to the Stock Trader’s Almanac, US markets have advanced by 273 per cent in the first two years of a presidency, compared to 724 per cent in years three and four.

Between 1900 and 2010, notes Ned Davis Research, markets gained by just 4 per cent in year one compared to 11 per cent in year three.

Unpopular decisions are put off until after elections, the theory goes, with economic stimulus typically reapplied in the second half of the cycle.

And it’s not confined to the US. Goldman Sachs noted last year that the US election cycle explains a “sizeable fraction” of returns in other developed and emerging markets.

Dividends back on radar for investors

Last year, S&P 500 companies paid out a record $281 billion in dividends, 17 per cent higher than in 2011 and 13 per cent above the previous record in 2008.

It continues the upward trend in dividends that began in 2000, when US yields finally began to climb, having hit a record low of just 1.1 per cent. Despite 2012’s payout, however, US yields remain low at just 2.1 per cent compared to 3.7 per cent in Britain and 4 per cent in Europe.

S&P 500 yields have averaged 4.45 per cent going back to 1880, accounting for half of total equity returns. Yields never went below 3 per cent for any period of time until the 1990s, when

investors dissed dividend income under the assumption of perpetual capital gains.

That has been the only decade that dividends did not account for at least 33 per cent of equity returns.

2012 was not a good year for high-yielding companies. The lowest-yielding stocks gained 16 per cent, while the highest payers declined slightly.

However, studies show that companies with the highest payout ratios generate higher earnings growth over the following decade. That goes for Britain, Germany, France, Switzerland, Japan and Canada as well as the US.

Two savage bear markets over the last decade mean dividends are back on investors’ radar, so the differential between US and European yields should narrow in coming years.

Market lessons of 2012

Market strategist Josh Brown ( thereformedbroker.com) asked fellow bloggers and commentators what lessons they had learned in 2012.

“The news continues to be a distraction for making money in stocks,” said Brian Shannon of AlphaTrends, while FT Alphaville’s Cardiff Garcia said that advice is “often well-meaning but rarely useful. Typically it’s a justification for the adviser’s beliefs and betrays the inadequate attention paid to the advisee.”

Steve Spencer of SMB Capital said 2012 reminded him that “data always trumps dogma”, while Kevin Roose of New York magazine is unlikely to be the only journalist to discover that it is “impossible to make normal people care about Libor”.

Two of the pithiest and best lessons of 2012 were delivered by Brown himself in a separate blog post. One: uncertainty is a buy signal, not a sell signal. The second lesson is a related one: usually, the asteroid misses Earth.

Will Twitter float in 2014?
 
And 2014 could be the year when Twitter goes public, according to IPO experts Greencrest Capital.

Social media flotations have not gone well in recent times. Facebook more than halved before recovering in recent months, while shares in both Zynga and Groupon have fallen by more than 80 per cent.

Currently traded on opaque secondary markets, Twitter is valued at $11 billion, Greencrest'sMaxWoolf told Forbes – a higher valuation than lastMay, prior to the Facebook IPO.

Researchers at eMarketer have estimated that Twitter recorded $260 million in advertising revenues in 2012, meaning it's trading at a whopping 42 times sales.

MaxWoolf says Twitter is cheaper than Facebook was when it went public. However, that's not saying much –
Facebook's IPO was one of the most expensive of the past 40 years.