2013 Year in Review & 2014 Outlook
"An investment in knowledge pays the best
interest."
—Benjamin Franklin
Investing should be more like watching
paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."
—Paul Samuelson, economist,
and Nobel Prize winner
We've just entered the new year, making it the perfect
time to take stock of 2013 and share some
thoughts on how we can help position
your portfolio as we continue
down the road called 2014.
There is no better place to start than to re-create
the atmosphere that greeted investors at the conclusion of 2012. The country had just emerged from a bruising
presidential election, and the fiscal cliff loomed large over the economy and
the markets.
Without any action by Congress, steep tax increases were scheduled to take effect, threatening to tip the economy into a recession
again. At the midnight hour,
Congress managed to
craft a narrow bill that raised taxes
for the wealthiest Americans—about 1%—while
enshrining the Bush-era tax cuts as law for the rest of the population.
It wasn't the so-called
Grand Bargain that some had dared to hope for.
Nevertheless, the economy sidestepped the fiscal cliff, a stiff headwind
for the market
was removed, and stocks roared
out the 2013 gates, foreshadowing what would be the best year for the S&P 500 since 1997, according
to data provided by the St. Louis Federal Reserve.
Even better,
the headlong plunge
into equities lifted the riskier
S&P SmallCap 600 Index by nearly 40%, according to Standard & Poor's.
2013 Performance
|
||
1 year
%
|
3 year
%
|
|
Dow Jones Industrial Average
|
26.50
|
12.71
|
S&P 500 Index
|
29.60
|
13.70
|
Nasdaq Composite
|
38.32
|
16.33
|
S&P SmallCap
600 Index
|
39.65
|
16.98
|
MSCI World ex- USA
|
17.78
|
4.23
|
MSCI Emerging
Markets
|
- 4.98
|
- 4.50
|
Source:
Wall Street Journal,
MSCI.com
The three-legged stool
Many are asking, "Why did we see the emergence
of a ferocious bull market
when the economy
is still limping along?"
It's a great question. The short answer: 2013 turned out to be the year that bad news was good news.
Let me explain. First, the economy
has been limping along since it officially emerged from the Great Recession
in late 2009.
With job growth in low gear and inflation
even lower, the Federal Reserve
embarked on a series of bond purchases, popularly called quantitative
easing, or QE for short.
Remember, by definition,
rising bond prices equate to falling yields.
The Fed's goal? Put downward pressure
on yields in the hopes that consumers
and businesses would borrow and spend, sparking
job growth.
Reviews on the
effectiveness of QE have been mixed,
but one thing seems certain:
The Fed's ultra-easy monetary policy
has been a boon for the stock market.
Second, we wouldn't discount
the impact from rising corporate profits. According to Thomson Reuters, earnings per share (EPS) for S&P 500
companies hit a record in the first quarter of 2013, and subsequently broke
the record in the second
and third quarters,
respectively.
Moreover, analysts
are forecasting another
high in the fourth quarter.
True, economic growth
has been substandard, but very modest revenue
gains, coupled with a very keen eye on expenses,
have been a tailwind for profits.
That leads us to the third leg of the stool: Companies have more cash than they know what to do with, at least the major corporations. Given heightened levels of economic
uncertainty and few opportunities to expand, companies are buying back stock (or borrowing at record low interest rates to finance
purchases).
Yet it is not just the repurchases of shares that count, but whether companies
are also selling new shares
to the public. Howard Silverblatt,
senior index analyst at S&P
Dow Jones Indices,
summed it up well in December when he said, "We are starting to see excess buying, where the repurchases outnumber the issuance,
and therefore, reduce
the share count. The lower share count leads to higher EPS, and the market likes higher EPS."
While the repurchase of company stock has underpinned the market, dividends
have also sweetened the pot. S&P Dow Jones Indices estimates that companies returned
a record $310 billion last year in
the form of dividends.
Finally, though we hesitate
to call this a tailwind,
Europe has quieted down. Banking
woes haven't been put to rest, but the vicious
headlines that swirled across the continent
and created uncertainty in the U.S., especially in 2011, were mostly absent
last year. Think of it like the fiscal cliff—for now, a hurdle removed.
Bond market: Dancing to a different tune
Early gains in Treasuries were replaced by jitters
that QE was on the verge of being reduced by
the Fed, and Treasuries responded accordingly. The 10-year Treasury yield,
which began 2013 at 1.78%, ended at 3.04%. Note that rising yields did
little to slow the equity
juggernaut.
At the December meeting,
the Fed finally announced it would reduce
the $85 billion in monthly
bond buys by a modest $10 billion,
with promises of more cuts in 2014 if the economy cooperated.
Meanwhile, losses in corporate bonds were more muted,
and high-yield debt, which hit a pocket
of turbulence in the middle of the year, outperformed most bond classes.
That shouldn't
come as a surprise, since an expanding economy has historically lent support to
firms that are on the credit bubble.
The 2014 crystal ball
Baseball legend
Casey Stengel once said, "Never
make predictions, especially about the future."
With that in mind, I'll cautiously peer into my crystal ball, however fuzzy it may be.
Everything that drove stocks
to new highs in 2013 remains in place: super-low interest rates, expectations of further growth
in corporate profits, and the belief that companies will continue to return cash to shareholders. Further, any acceleration in economic activity
that might reduce QE could be supplanted by rising corporate profits, which might shoulder more of the heavy lifting.
Still, you may ask, aren't record
stock prices setting us up for a fall?
Remember that what goes up must come down, at some point. This physical law also holds true in the
financial markets and I have witnessed it several times first hand during my
almost 20 year career!
That being said, however, significant challenges remain in the economy
for small to medium sized businesses that weren’t bailed out by the government during
the Great Recession. Higher taxes and
health care costs will dampen the growth opportunities for the majority of
small to medium sized businesses.
Yet we're never really in the clear. Questions being asked include:
What will the Fed do? Will the shallow recovery
in Europe take root, or will banking
woes resurface? Will China continue to grow, or is an economic hard landing inevitable? Will conflict
in Washington rock the boat?
Could we see new problems surface
in the Middle East? Historically, geopolitical headwinds have proved
to be temporary, but that doesn't eliminate the possibility of heightened uncertainty over a short time period.
More favorably, will faster capital
spending take hold,
supporting the economy? And how will the energy
boom continue to underpin growth?
What this means for your
investments
No one, and I mean no one, can accurately predict the future. I know that seems obvious,
but we've all seen those late-night commercials
for tools that claim to effectively time the market.
Could we have a correction in stocks that pull the major averages
down by 10%-15% or more? It's always possible.
Corrections have a way of catching the consensus off guard, creating
unwanted anxieties.
We always stress that you must be comfortable with your portfolio.
There is always some uncertainty when investing. As we talk about in our meetings with our clients, our goal is to. But you must be comfortable with the level
of risk you're taking as you set out to meet your
objectives. If you are not, let's talk and recalibrate.
Stick to the plan. Markets rise and markets fall, but unless there have been changes in your circumstances or you've hit milestones in your life, such as retirement, stay with the
plan. For example, it was
tempting for many to cash out of stocks in
early 2009. But hindsight has proved that a wholesale deviation
would have
been costly.
Rebalance. Last year's surge in equities
may have knocked you out of alignment
with your target stock and bond allocations. Now may be the time to take profits on winners and selectively reallocate proceeds into bonds.
Don't discount
international. Emerging markets have been underperformers over the last couple of years, but the more developed economies in Europe have been stronger. The U.S. may or may not outperform the rest of the world in 2014, but over the longer term, I firmly believe
that exposure to global markets is beneficial and helps to reduce risk.
We realize
complacency can sometimes
set in following a euphoric
rise, but we can guard against that with a portfolio crafted
with your objectives and risk tolerance in mind.
We hope you've
found the annual summary to be both educational and helpful. Should
you have questions or comments
or want to discuss any other matters,
please feel free to reach out to me or anyone on my team.
As always,
we truly value the trust our
clients place in us, and I want to once again thank them for the opportunity to serve as their financial
advisor!
We wish you and your family a very happy and prosperous New Year!!!
Sincerely,
Your White House Financial Team
White
House Financial & Settlement Consulting Solutions helps a busy and active community
of people achieve and maintain financial freedom. We do this by acting as
our clients’ trusted advisor and providing a personal touch customized to the
client’s needs! Please visit our web site at www.whitehousellc.com or contact us
directly for more information!
White
House Financial & Settlement Consulting LLC
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offered through Sigma Financial Corporation. Member FINRA/SIPC
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House Financial & Settlement Consulting LLC is independent of Sigma Financial Corp. and Sigma Planning
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