Pessimism a Positive Sign for Stocks in 2013

What stocks or sector would your sell or avoid right now?

Buckingham: Because consumer staples and utilities performed very well in 2011 and they have performed admirably again in 2012, we are not finding a lot of inexpensive stocks in those sectors. Valuations are generally tilted more toward the high end of their historical range and above the metrics associated with the average stock in our broad-based Russell 3000 benchmark.

What is your outlook for 2013?

Buckingham: While we suspect that the equity markets thus far in 2012 have vastly exceeded the expectations of most pundits, it is fascinating that investor fear levels are running a long way from optimistic, taking into consideration sentiment gauges, mutual fund flows and our own conversations with our managed account clients! To be sure, there is plenty about which to be concerned, from the results of the election to the so-called fiscal cliff to the long-playing problems in Europe, but the lack of enthusiasm for stocks is why valuations are attractive, especially relative to the record-low interest rate environment.

All this in mind, and with an economy that is likely to "muddle through" to 2.5% or so GDP growth, we can't help but be upbeat about the prospects for equities in 2013. Corporate balance sheets generally are quite healthy, corporate profits are robust with stronger growth projected next year than what was seen in 2012 and dividend yields are as lucrative relative to the 10-Year Treasury as at any time since 1958. That doesn't mean we are expecting smooth sailing in 2013, but gains of 10% to 12%, in line with the historical norm, certainly would not be a surprise.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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