The economy today has progressed to the middle stages of the recovery. In the early stages, we typically see companies in cyclical sectors outperforming the rest of the market and rebounding from their lows with huge earnings growth rates. In the middle stages of the recovery, earnings growth rates have converged, correlations have declined, stocks are behaving more independently from each other, and valuations are more similar across the market.

While investment opportunities are less obvious in this environment, I remain optimistic about prospects for U.S. equities. Nevertheless, we are unlikely to see equity returns continue upward in a straight line, and 2013 will not be without its variations and risks. It is worth remembering that in the past several years, we saw first-quarter rallies that quickly turned downward in the second quarter. While we do not consider it likely to happen again in 2013, we remain vigilant to the possibility that the equity advance could take a pause in the months ahead.