Submitted by Lance Roberts of STA Wealth Management,
While the markets finished 2013 less than two points from my target of 1850; the start of 2014 was less than exuberant as the markets turned in the steepest loss for the first trading day of a new year since 2008. What does this mean for the rest of 2014? Likely not much. The old Wall Street axioms of “the first 5 trading days” and “so goes January, so goes the year” tend to be statistically more important. However, it did get me thinking about the new year from a more macro perspective. This weekend’s “Things To Ponder” is a collection of ideas to get you to do the same.
1) No Catalyst Needed by Henry Blodgett
“I own stocks, so I’m certainly enjoying the advance. But unlike some other investors, I’m not feeling more comfortable as they move higher. Rather, I’m feeling less comfortable.
Because I do not think that time-tested market valuation measures have recently become out-moded and irrelevant. As I’ve described, these valuation measures suggest that today’s stock prices have gotten so extreme that returns over the next decade are likely to be lousy (less than 2% per year, including dividends). So that’s what I’m expecting long-term stock returns from these prices to be.
Now, valuation is not helpful as a market-timing tool, so today’s prices do not mean that stocks will crash anytime soon (or ever). Instead, stocks could deliver lousy returns just by moving sideways for a decade.
But anyone who has followed the stock market for a while knows that stock prices do not generally correct valuation extremes by moving sideways. Rather, stocks generally correct sharply.
That’s why I’ve said I think the odds of a market crash are increasing.”
The entire article is worth reading, but the key point is that history suggest that corrections can happen without there being some major economic or financial catalysts. Reversions to the mean can, and do, happen throughout history and wreck havoc on individuals retirement goals. Avoid becoming too complacent with the financial markets, and the amount of risk that you are taking within your portfolio.
2) Q&A On The 2014 Outlook by Pragmatic Capitalist
My friend Cullen Roche took a stab at answering 10 questions for 2014.
1. Will the economy accelerate to above-trend growth? No.
2. Will consumer spending improve? Consumer spending is likely to continue stagnating.
3. Will capital expenditures rebound? Corporations are increasingly picking up the slack in the US economy and as has been historically true, as we enter the latter stages of the business cycle, capital expenditures are picking up.
4. Will housing continue to recover? National housing prices have risen too far too fast in many areas of the USA and should see much more modest improvements in the coming years.
5. Will labor force participation rate stabilize? The improvement in the economy combined with the structural negatives do not leave me entirely optimistic that the labor force participation rate will see material improvement in 2014.
6. Will profit margins contract? The likely risk to profit growth and margins is to the downside.
7. Will core inflation stay below the 2% target? I would expect core inflation to remain low as consumer demand for shelter, autos and other core items remains tepid.
8. Will QE3 end in 2014? QE is likely to taper in increasing increments during 2014, but I do not think the Fed will pull the punch bowl away just yet.
9. Will the market point to the first rate hike in 2016? I am going to go way against the consensus here and argue that the next recession is likely to occur before the next rate hike.
10. Will the secular stagnation theme gain more adherents? I think the fragile economy combined with the potential for an overly bullish stock market could pose risks to the economy in the coming years.
3) Gleaning Clues For A Forecast Of Year Ahead via NY Times
Why do we forecast when the majority of forecasts are always wrong? Paul Sullivan explores this idea.
“WHY PREDICT? Whatever its value, the one-year prediction, Mr. Ryan said, is ingrained in who we are as people. ‘We account for our life in four seasons,” he said. ‘What did farmers focus on in the summer? What the fall crop was going to be. What did they focus on in the winter? How much rain they were going to get in the spring. We talk and think in temporal terms. The year ahead — it’s always reinforced.’
Others find the exercise of one-year predictions a waste of time. ‘Nine out of 10 times when I’m asked what will happen next year, I say stocks will tend to perform along the historical average, which is 10 to 12 percent a year,’ said John Buckingham, chief investment officer of Afam Capital and editor of the Prudent Speculator newsletter. ‘Have I ever been right? No. I don’t care what the market will do. I had an expectation of 12 percent at the beginning of the year, and I was wrong. But I’m up 30 some percent in my portfolios and I’ll take that.’
He added that revising predictions during the year could be equally perilous: ‘The best time to get out of equities this year was August. We had Syria, the Fed talking about tapering, a government shutdown and September and October are generally bad months. What happened? We were up 4 percent each month.’
But his biggest worry was the predictions he had seen for another 20 percent increase in stock prices. ‘I’d rather have a contrarian view,’ he said.
Of course, that is still a prediction, even if it goes against the grain.'”
4) Can The Wall Street Bull Continue Charging In 2014? by Adam Shell, USA Today
“Do U.S. stocks have any rocket fuel left in the tank after skyrocketing to their steepest annual price climb in 16 years?
After posting its best return since 1997, the odds of the broad Standard & Poor’s 500 stock index delivering an encore performance of similarly epic proportions in 2014 is unlikely.
Yet, while Wall Street isn’t expecting gains of 25% to 30% again in 2014, after a 29.6% return for the S&P 500 index in 2013, most stock market predictions lean bullish. More gains (albeit, less sizable ones) and more record highs are likely. There’s a long list of positive propellants working in the stock market’s favor.”
He specifically notes:
- An improving economy
- Pickup in corporate spending
- Increased consumer confidence
- Still easy Fed
- The “Great Rotation” into stocks.
5) On The Other Hand Stocks Could Fall By 20% via Wall Street Journal
“U.S. stocks can’t go straight up forever. And if the end of QE1 and QE2 taught investors anything, the market could suffer a significant correction this year as the Federal Reserve starts dialing back its stimulus.
That view comes courtesy of Peter Boockvar, managing director and chief market analyst at the Lindsey Group, who on Thursday predicted the S&P 500 could drop 15% to 20% in 2014 and finish the year between 1550 and 1600.
‘QE doesn’t create a safer world, it is just a temporary high and the danger always comes on the flip side as previously seen,’ he says. ‘Let’s be honest, we are in an investing world that none of us has ever seen before with central banks around the world being aggressive in concert on a scale never seen.’
‘These are not normal times where the ordinary analysis of company fundamentals and the economic and earnings outlook are the main drivers.’
‘Our drunken friends have had some cheap thrills in 2013, but this stock market growth rests on an unstable foundation of artificial stimulus and cheap money,’ writes Peter Schiff of Euro Pacific Capital. ‘We are more interested in waking up without a hangover, a wrecked car, or worse. The longer interest rates remain suppressed, the crazier markets will behave when rates rise.’
‘QE puts beer goggles on investors by creating a line of sight where everything looks good, but the Fed’s current plan is to end it by year end,’ he says. ‘While the bull case says this is no problem because it only happens coincident with a better economy, the bond market is repricing the cost of capital higher and that will clear out the goggles as our economy is still very leveraged…and highly dependent on free flowing and abnormally cheap money.'”
Regardless of what actually happens in the year ahead – may your year be healthy, safe and happy.