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A New Year's rally that sent all U.S. stock markets roaring upward Wednesday could be a harbinger of good times ahead, but local financial advisers warned not to bring out the 2007 party hats just yet.
After a year of impressive across-the-board gains in the U.S. stock markets last year, many advisers are expecting a quieter year in 2013 - though some say a mass exodus from low-yield government bonds could heat up equities once again.
"The risks are probably on the bond side," said Bill Middleton, principal of Sound Portfolio Advisors in Mystic. "How that plays out will be interesting."
Middleton refers to a scenario in which the Federal Reserve begins to jack up record-low interest rates, which in turn would cause people to sell off government bonds and buy stocks. Bonds fall in value as interest rates rise, so they become riskier investments in an era of escalating interest charges.
But Middleton said he isn't sure the U.S. economy will be strong enough this year to warrant a Fed move on interest rates. It's more likely, he said, that rates will rise naturally, based on consumer demand.
"I'd be concerned with the extent of exposure to long-term government bonds," agreed Tom McGuigan, principal in Old Lyme-based Exencial Wealth Advisors.
Financial analysts said Wednesday that stocks - which gained more than 2 percent on the first day of trading after the New Year - continue to look like good investments in 2013. And this follows a year in which the average U.S. equity gained more than 16 percent in value, while overseas stocks performed even better.
Some of the uncertainties of 2012 are now behind us, analysts said, including the presidential election and the so-called "fiscal cliff" dilemma that was resolved by Congress Tuesday with a compromise that calls on wealthier Americans to pay a higher percentage of their earnings in taxes. Europe, which at points last year appeared to be teetering on the edge of financial panic, has managed to avoid calamity.
Other problems persist, including one more possible showdown on America's debt ceiling as well as continued high U.S. unemployment rates. But major U.S. corporations have weathered financial storms over the past five years very well, analysts said, and the key price-to-earnings ratios of large companies remain low, indicating some upside to stock prices.
Middleton, the Mystic adviser, allowed that the year after a presidential election tends not to be a good one for stock prices. But he said attractive stock valuations combined with a wobbly bond market could finally begin driving individuals - who bailed out of equities in the financial panic of 2007-08 - back into stocks.
"Price-to-earnings ratio is a good starting place," Middleton said. "Bad things don't happen at these valuation levels."
Bob Henderson, principal at Lansdowne Wealth Management in Mystic, said the U.S. economy still faces some structural problems, including a national debt that escalates by $1 trillion a year.
"We can't do that indefinitely," he said.
But, while he wouldn't discount the possibility of a major market correction sometime in 2013, Henderson remained cautiously optimistic and said he wouldn't be surprised if the Dow Jones industrial average - made up of 30 major companies on the New York Stock Exchange - exceeded 14,000 by the end of next year, which would put it in territory not seen since before the financial collapse.
Analysts said the keywords for 2013 include diversification, value, minimizing risk, dividend growth, earnings growth and quality stocks.
Josh Lyons, principal of Lyons Asset Management of Stonington, agreed that slow to moderate growth will likely be the mantra for 2013. Certain sectors such as technology companies and auto manufacturers will likely do better than others, he said, but some sectors, including financials and retail, will likely lag behind.
"The big hindrance is the consumer," he said. "Consumers are not spending a lot of money."
The political machinations that led to the fiscal cliff showdown and could provide further embarrassment if the U.S. debt ceiling devolves into more bickering in the next few months is another cloud over the market, analysts said. But with major tax issues settled, at least attorneys, accountants and others can get back to work with some assurances about the future, they said.
The biggest concern, McGuigan said, is for those on fixed-income securities whose rates are so low that people can never keep up with inflation.
"Fixed-income earners will continue to get crushed with the loss of money and purchasing power," he said. "I see no improvement in the New Year for that."
S&P 500: +13.4%
Russell 2000: +14.6%
Dow Jones industrials: +7.3%.