4 Macro Trends That Will Dominate 2013

In the theme of Christmas and the spirit of giving, I plan to use the next week leading up to Christmas to continue counting down the 12 Days of Christmas in all its Foolish glory. In my rendition of this Christmas tale, you won't be hearing about turtledoves or French hens, but you'll probably hear about great ways to save money in 2013, or about CEOs who laid rotten eggs in 2012.

In the previous "Foolish Days of Christmas," we've looked at:

As always, I ask you to sing along with me: "On the fourth day of Christmas my true love gave to me..."

The four macroeconomic trends that will dominate 2013!

As often happens during the course of the year, few of the bigger trends we're watching now will be part of the major news events during the course of the year. Therefore, projecting what macro trends will dominate 2013 is both a science and a lot of blind luck (so no dartboards bearing my resemblance if I'm wrong!). Here are my projections for the four trends that Wall Street will focus on next year.

1. The housing recovery
For much of the past two years, Wall Street has spent much of its time focusing on the unemployment figure as the end-all, do-all of whether our economy was back on the right path. With what appears to be a bottom in the housing sector now in place, homebuilders might be the "green shoot" every economist is going to point toward in 2013 and base their economic projections off of.

Understandably, the housing recovery is still in its infancy despite taking a good six years to reach bottom. Homebuilder sentiment, though at a six-and-a-half year high, is still only at 47 (anything below 50 signals a pessimistic view on homebuilding) , and home prices have yet to make a sizable move higher in many areas of the country. Yet homebuilders have been putting on a clinic for Wall Street highlighted by impressive homebuilding margin expansion and new net orders. Lennar (NYSE: LEN  ) has been adding to its already sector-leading homebuilding margin of 22.3%, and even previously struggling builders like PulteGroup (NYSE: PHM  ) have seen a dramatic rebound in orders, backlog, and even a modest uptick in sale prices .

In order for this rally to continue, homebuilders will need to be able to absorb a cluster of foreclosures still on the market, as well as resist what could be negative implications in the fiscal cliff debate, including a reduction in the mortgage interest deduction.

2. The U.S. debt ceiling
That's right! Not the fiscal cliff, not record-low interest rates wreaking havoc of savings accounts, but the U.S. debt ceiling looks to be a prime focus for investors heading into 2013. We all knew that higher taxes were eventually on their way considering that the U.S. economy has rebounded mightily from its 2009 lows, so fiscal cliff talks will probably die down in just a matter of weeks. U.S. debt ceiling ire, however, may continue throughout the year.

Not shortly after the fiscal cliff debate ends, we'll begin hearing (yet again) about the need to raise the U.S. debt ceiling, which will max out in February based on its current projections. What's truly disturbing is that Congress has raised the debt ceiling 78 times (that's a seven with an eight following it) since 1960! If you need an even starker example of how rapidly the United States' debt has ballooned relative to GDP, then check out my Foolish colleague Alex Planes' excellent U.S. debt ceiling infographic.

Could the 79th debt ceiling hike be the impetus that coerces real change? I'm not holding my breath, but I believe so. A fiscal cliff compromise or a "no deal" will cut federal spending in one way or another, and the American public (as well as the examples in Europe including Greece, Ireland, and Portugal) has made it very clear that working toward a balanced budget isn't optional -- it's mandatory.

3. China's GDP growth
If you thought China was an important part of the global economy in 2012, then expect to see some people sitting on the edge of their seats, fingers and legs crossed, chanting for a rebound in China's growth rate. China has effectively taken the global economy on its shoulders during even the darkest times of 2009. From copper producer Freeport-McMoRan Copper & Gold (NYSE: FCX  ) which counts on China for a majority of its exports, to big multinationals like Coca Cola (NYSE: KO  ) and Caterpillar (NYSE: CAT  ) which rely on China's rapid growth to expand their beverage line or heavy-duty equipment for infrastructure improvements, China is that big of a deal!

Roughly 18 months ago, China was dealing with inflation above 6%, forcing its hands to boost reserve requirements for its banks to curb spending and reduce inflation. Currently, inflation has dipped below 2% , however GDP growth has also slumped to a three-year low at just 7.4% -- well below China's 30-year average GDP growth rate of 10%.

Investors will be focused now more than ever on China's efforts to reinvigorate growth now that inflation figures are under control. In September, it approved a $156 billion infrastructure bill that should help boost sales for construction companies like Caterpillar. Also, it's reduced reserve requirements for its banks three times this year in the hope that it'll spur lending. Given a reduced spending outlook in Europe and the U.S., China's global importance just keeps rising.

4. Italy & its debt
I know what you're thinking: "Italy? That was random!" The idea really isn't that far-fetched considering we've had a new European country steal the headlines for months at a time in each of the past few years. Greece, Ireland, Portugal, and Spain have each taken their turn scaring the daylights out of investors as the paper napkin known as the EU economy slowly unravels. This year, I believe it's Italy's turn to scare investors back under the bed sheets.

What makes Italy a particularly troublesome candidate worth watching this year is the fact that it's had four straight recessionary quarters, and its debt as a percentage of GDP has risen from 123.7% to 126.1% in the past year -- a level and trend I find unsustainable. To make matters worse, Italy's Prime Minister Mario Monti recently announced his intention to resign and pave the way for elections in February 2013. The markets don't like periods of transition and uncertainty, and Italy looks like it'll pour them on with added frequency next year.

Even Italy's two largest banks are struggling in its low-interest rate environment. With home prices falling and very few pathways of traditional banking growth available, both Intesa Sanpaolo and Unicredit have been hurt by Italy's austerity measures.  

Italy provides a perfectly dubious catch-22: Austerity is needed as the current pace of debt growth is unsustainable, but without an infusion of cash, its economy can't gain the proper footing to grapple with its interest payments. Something tells me Italy's 10-year bonds are going to be a prime focus in 2013. 

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  • Report this Comment On December 21, 2012, at 8:19 AM, jambo297 wrote:

    I love the 12 days theme but I need to add to the four (4): rising natural gas price is a trend that will affect electric utilities, coal, chemical, LNG export possibilities, drillers, and household consumers. See recent articles by TMFArcher (12-8 & 12-20) as well as TMFThe Whisperer (12-19).

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