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Stage is set for real recovery to emerge

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Many years ago, legendary economist John Kenneth Galbraith said, "The function of economic forecasting is to make astrology look respectable."

There's a pretty good chance economists, not to mention Wall Street analysts, may be looking to the heavens for some guidance in 2013. It is hard to find a time in recent history when so many wild cards have the potential to spoil even the best thought-out forecast.

"There is virtually no doubt that the United States will undergo some form of fiscal tightening in 2013. The net is that there will be at least some drag on economic growth," said Liz Ann Sonders, chief investment strategist at Charles Schwab. "But there are always many factors influencing economies and markets that can serve as fiscal tightening offsets. And, psychology always plays an important role."

An example, she says, is Hurricane Sandy. The impact of the economic recovery from the massive storm will likely balance some of the fiscal drags facing the U.S. economy at the start of 2013.

Investors don't have to look very far for excuses to stay away from stocks. Consider the events of 2012: A highly contested presidential election, economic turmoil in Europe and China, the prospect of higher income taxes, as well as a boost in capital gains taxes, and soaring health care costs are just a few of the dark clouds on the horizon.

Yet, some suggest this is the classic "wall of worry" that has preceded many of the greatest stock market rallies in history.

"Many Wall Street observers would have you quite concerned about investment prospects for at least the first half of next year. They cite low and slow economic expansion, higher taxes, and extremely modest growth in earnings for many listed companies. Let’s hope that the fear pushes markets down and offers a window of opportunity," said Ken Stern, managing director of Rancho Bernardo-based Ken Stern & Associates.

The challenge, therefore, becomes where to invest in these tumultuous times. Some are looking for opportunities linked to the monetary policy.

With interest rates low, and the Federal Reserve promising to keep them there, income-seeking investors will continue to enjoy few choices: Bank CD rates are minuscule and longer-term bonds, whose rates also are low, require that owners hold until maturity or face principal declines when rates start to inch up.

"Yields remain relatively high. While actual dividend payments set a record in 2012, companies still are paying out just 34 percent of their profits versus a historical rate of 52 percent. Even if no issue changes its dividend rate through 2013, next year's payment will be six percent higher than 2012," said Howard Silverblatt, senior index analyst at S&P Dow Indices.

You don't have to look very far to find a long line of other analysts who share Silverblatt's belief that dividend-paying stocks will continue to provide exemplary returns in 2013 as they have in the past few years.

At the same time, if the stock market goes through a correction, those dividends can come in handy.

"Dividend-paying stocks have historically provided some downside protection in volatile market environments due to the fact that they are typically companies that have a record of generating strong earnings and cash flow which gives them the financial strength to pay a dividend," according to a research report published by Dreyfus.

Another trend to propel the economy and financial markets is the housing market, which appears to have officially moved into recovery mode.

"Some of the more bullish economic forecasts for the coming year suggest a steadily rising trend in home prices will bring a return to the home equity-induced consumption patterns that preceded the downturn," said Keith Hembre, chief economist at Nuveen Asset Management. "Furthermore, the link between home prices and median family income growth that was reestablished following the housing bubble should remain in place in the coming years."

Bottom line, the stage is set for a real recovery to emerge — with one huge caveat.

"If policymakers can work it all out, the U.S. economy is ready to take the recovery the rest of the way," said Jolanta Campion, director of research for Cassidy Turley San Diego. "Consumers have never been more confident in this recovery than they are currently. It is time for policy makers to put aside partisan bickering for the good of the country and just get it done."

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