If one focused just on the economic headlines, 2012 was perceived as a year of angst and handwringing. Some expect 2013 to be more of the same, especially with fiscal issues still unsettled.

"We had lower than expected fourth-quarter retail sales. Consumers are still very judicious about consumer purchases. CEOs are neutral, at best, about hiring and investments," says Matt McCormick, portfolio manager with Cincinnati investment firm Bahl & Gaynor. "We are expecting more volatility, not less."

But hang on. Was it all that bumpy a year? McCormick acknowledges 2012 was "surprisingly strong" even as he remains wary of the recovery.

And Nick Sargen, chief investment officer at Fort Washington Investment Advisors, Inc., says if you look beyond the doom and gloom headlines, the markets were pretty happy.

S&P Up 16 Percent

"2012 was a great year," Sargen says. "S&P up 16 percent; investment grade corporate bonds up almost 10 percent; high yield up 15 percent. Even international markets matched the U.S."

Sargen is optimistic as well about 2013, although he doesn't expect the market to be quite as strong as last year. He foresees a sluggish first quarter, given recent tax increases, including a bump in the payroll tax withholding, but he sees greater momentum as the year goes by.

"My main message is that economic conditions in the U.S. are gradually improving and will be getting better. I'm in the camp that 2013 will be another solid year for the stock market, but the four-year run of the bond market generating outsized returns is over. The reason is those returns were generated on the back of interest rates falling to historically low levels. If the economy is improving, you have to expect a process where interest rates are normalizing."

Sargen chooses not to focus too much on the sluggish growth in GNP, noting key factors are in place for a steady recovery. He says consumers are confident and corporations continue to show solid profits.

And with consumer confidence strong, people are buying big-ticket items "” like cars and homes "” and starting to feel as if they don't have to worry about their jobs. Sargen points out that, for the first time since 2007, the residential housing sector made contributions to the economy rather than being its drag.

"Consumers are not as debt burdened thanks to the Fed giving record low interest rates. Debt service ratio is at a three-decade low. Some say the American consumer still has too much debt. But they need to look at how easy the Fed has made it to service it."

Sargen says the stock market is strong because corporate profits have doubled since the recession hit "”  today about $2 trillion, up from around $1 trillion after the sell-off.

"The stock market is doing well because it remains a barometer of the corporate sector," Sargen says. "The corporate sector has undergone the most extensive adjustment I have ever seen in a crisis economy. Corporations are sitting on mounds of cash."

For that reason, Sargen still sees stocks as a good investment even as he feels bonds have probably peaked, because so much of the returns were driven by government support of the bond market.

"I don't think stocks are overpriced," says Sargen. "We'd rather invest in a market that looks fairly priced, or even cheap, as compared to the bond market that looks very expensive right now."

Cautious APPROACH

McCormick is a bit more wary about the recovery saying, "A lot has to go right and it could be derailed by any one thing that could go wrong. Europe is still a mess, China appears to be slowing and there are other geopolitical issues. The election put off a lot."

McCormick recommends the strategy that has defined Bahl & Gaynor as a dividend-centric wealth management firm.

"We are recommending investors focus on quality companies that pay dividends. The blue of the blue chips. Companies that have needs, not wants," says McCormick. "Dividends are an antidote to volatility. And if the economy is stronger than we expect, this strategy still pays."

Sargen also likes dividend stocks as a solution for the quandary facing baby boomers and others 5 to 10 years from retirement. They may not want the risk of the stock market, but traditional savings instruments can actually lose money, especially if inflation returns to normal levels. And bonds may not be the answer they once were.

"I would say take some of the money in bond funds and put into dividend-paying stocks," Sargen says. "The Bush tax cuts on dividends did not go completely away. It only went to 20 percent from 15 and that's manageable."

McCormick says he's already seeing clients trending away from bonds and toward the dividend strategy. "Bonds work well in a lower-interest environment. You get your money back, but how much is inflation going to diminish your return?"

Eyes on the Market

Some have called last year a "stealth market" as the stock market soared amidst headlines that often screamed negativity. Most experts agree the market has a good chance of posting continued gains as the recovery strengthens but perhaps not quite as robust as 2012. But the angst over fiscal issues will continue thanks almost solely to the poltical climate.

"The political process could derail the economic progress we are seeing," McCormick says. "And it can be frustrating. This is entirely a man-made issue. As investors, you have no control."

Sargen has to laugh at the absurdity that his biggest worry is the politicians, not the underlying indices of the economy.

"The market was relieved we didn't go over the cliff. That's how low expectations are. It's crazy. This debate isn't over. The politicians could still do something that makes people less confident and spooks investors."