The price of gold and the U.S. stock market will both hit record highs in 2013, contend forecasters at Merrill Lynch.
The projections, made Tuesday at the investment bank's annual outlook conference, are some of the most bullish in the current batch of year-end brokerage forecasts, the annual ritual in which investment analysts spend part of December peering into their crystal balls for clues on where their clients will find the best opportunities over the next 12 months.
Merrill's upbeat take is based on its view that the global economy will strengthen gradually next year, as major central banks continue their easy-money policies.
"We are actually pretty unapologetically bullish for 2013 for the overall U.S. equity market," said Savita Subramanian, head of U.S. equity and quantitative strategy for the investment bank.
The S&P 500 is trading around 1,430, but could rally nearly 12 per cent by the end of next year to reach the 1,600 level, according to Ms. Subramanian. That advance, should it occur, would eclipse the S&P's record high of 1,565, which it touched briefly in 2007, before the financial crisis caused prices to swoon.
Meanwhile, gold could rally to $2,000 (U.S.) an ounce by the end of next year and $2,400 the following year, said Francisco Blanch, head of the bank's commodities research. Gold has recently been trading around $1,700. Bullion will move higher as investors use the metal as a hedge against global uncertainty, and the inflation that could result from monetary easing by the European Central Bank and the U.S. Federal Reserve. The Fed alone is expected to create about $1-trillion in fresh money next year through purchases of government bonds and mortgage-backed securities.
Analysts at Merrill expect U.S. economic growth to strengthen during the year, once hesitation over the resolution of the "fiscal cliff" subsides and businesses begin to ramp up capital spending. Given the economic backdrop, "a new high level for the market is not a very outlandish expectation," Ms. Subramanian contended.
Although Merrill didn't name individual companies as favoured investments in its year-end forecast, it recommended exposure to sectors that will do well during times of continued economic growth, such as technology, energy and industrial companies. It also recommended buying big U.S. multinationals with global exposure, while suggesting investors reduce holdings of utilities and telecoms, both of which are near peak valuations.
The U.S. is likely to raise taxes on dividends next year and many investors fear the increased levies will drive down the price of stocks, but a Merrill review of previous tax changes showed that share prices typically don't react in such situations.
Merrill is tracking one indicator that is providing an even more bullish signal for U.S. stocks than the bank's official forecast. This is the percentage of assets that investment advisers are recommending be placed in equities.
A typical allocation in a normal year would be 60 per cent stocks, 30 per cent bonds, and 10 per cent cash. Currently, the recommended share for stocks is only 45 per cent, suggesting that advisers are bearish on equities.
Ms. Subramanian said that when the recommended allocation for stocks has fallen to less than 50 per cent, shares have gained an average of 30 per cent over the next 12 months. "I'm not forecasting 30-per-cent returns, but I think it's an interesting signal," she said.
Merrill also projects U.S. oil prices will average about $90 a barrel during 2013. But Mr. Blanch warned that surging crude output in the United States could drive the price down to $50 a barrel over the next few years.