First Quarter 2014 – Life After the Rally

In 2013, we benefitted from a 30% rally in the Standard & Poor (S&P) Industrial index.  Over the last one hundred years that has happened only 13 times.  After the first quarter, we have seen a more volatile market with a lot of “excess” gains taken back from many of the momentum stocks of the prior year, such as Actavis, Gilead Science and Wynn Resorts, all stocks many of our clients hold.

What can we reasonably expect for 2014?  The standard answer we, and it seems like most market strategists, give to this year’s forecast is, “We believe the market is fairly valued…but will probably not rise at last year’s pace.”  That seems like a safe statement and we supported this prognosis in our last newsletter with several valuation and momentum indicators.  What though, does history indicate is a likely outcome?  Since World War II, we have only six equal or better years of returns:  1950, 1954, 1958, 1975, 1995, and 1998.  Two other years in recent memory providing 26% returns were 2003 (after the dot-com collapse) and 2009 (after the financial collapse).  In all eight years, the next year’s return was positive.  In fact, the markets were up by at least 10% (1959) and as much as 30% (1955) after the six 30% years.  Our tendency in projecting is to take a middle of the road approach, not raising expectations to a high level, but history indicates that 2014 will likely be another “above average” stock-performance year.

I do not know how I can jinx the market any more than making the last statement, nevertheless, it is well supported by history.  So, what is all the volatility in the first quarter all about and since January was negative does that indicate a negative year?  Well first, the volatility was primarily related to two events, in my opinion:  the weather and the Ukraine.  The weather put fear in investor thinking because gross domestic production was expected to suffer; certainly retail sales.  So far, this thinking is correct as earnings appear to be more subdued for the first quarter.  The stock market, though, is always looking ahead and now that the quarter is over, investors are recognizing that the second quarter is being entered with latent buying.  Those customers who were kept from buying a new car by snow and frigid temperatures are out shopping right now!  So, though the market had struggles, it appears to be looking forward again.  The Ukraine is simply another geo-political item with which the world must deal.  If it were not for it, then there would be a Syrian chemical attack, an Iranian nuclear issue, Chinese computer hacking or a North Korean missile attack.  Political events usually create short-term volatility, but normally, diplomacy finds a way or some form of a war occurs.  Regardless, the markets survives.

Now, I will admit that the S&P index being down 3.8% in January is unusual and a little unsettling.  Only once in the eight years above did this happen and that was the last year following a big return, 2010, when the index was down 4% but the year ended up over 13%.  Keep in mind that the “January Effect” is more a conversation than a supported fact.  Since WWII, January has been negative 26 times out of 67 years.  Only half of those years did the market end negative for the year.  The “Super Bowl Indicator” has a better record than that and since the Seahawks won then one has to project the stock market will not do as well.  No, on second thought, I think I will throw out the Super Bowl and the January barometers and stick with history and good valuations.

barometer

As before, I believe the market is in the early stages of a long mega-bull market.  Most excesses were destroyed in the financial collapse of 2007-9.  Mega-bull markets can last twenty years.  They have their down years, but the rallies can occur multiple years with very positive results.  2014 should be one of those positive years.








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