5 Markets for 2013

Stocks are losing ground this morning, with the Dow (DJINDICES: ^DJI  ) and the broader S&P 500 (SNPINDEX: ^GSPC  ) both down 0.8% at 10:12AM EST.

The VIX Index rose above 20 yesterday on an intraday basis yesterday for the first time since July 25. The VIX, which is calculated based S&P 500 option prices, is measure of the market's expectations for stock volatility over the next 30 days.

Looking back
The end of the year is a good time to look back at some of the notable people that have left this world over the past 12 months. The development economist Albert Hirschman died on December 10, for example. The Economist featured an obituary [sign-up may be required] of this academic who took an unconventional path:

"He made his reputation as a development economist, focusing on Latin America, but he soon found himself trespassing obsessively -- not only into other sub-disciplines such as the theory of the firm but also into other disciplines entirely such as political science and the history of thought."

Charlie Munger, Warren Buffett's right-hand man at Berkshire Hathaway (NYSE: BRK-B  ) would certainly approve. Munger, a polymath, is a proponent of using a broad array of "mental models" to tackle difficult problems and has criticized academics for their extremely narrow focus (the "man with a hammer syndrome").

Looking forward
Investors are obsessed with growth. It's understandable, since earnings growth is a key driver of stock prices. However, time and again they take their eye off the other side of the equation: Valuations and the expectations embedded in them.

In 2012, Japan and Greece -- economic basket cases -- were among the best-performing equity markets in the world. In Japan, which entered its fifth technical recession in 15 years during the second quarter, the Nikkei 225 has risen 22% -- its best performance since 2005. Meanwhile, the Athens Composite Share Price Index has performed even better, up by just over a third as of Thursday.

Valuations and returns tend to revert to the mean. So which markets might be ripe for a reversal next year, along the lines of Japan or Greece? According to MSCI, the worst laggards over the past five years that continued to underperform their peers this year are: Ireland, Italy, Finland, Portugal, and Spain. Perhaps investors should consider a peripheral European cocktail to see in the new year. 

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