2013 was a good year for stocks with returns and below average drawdowns. Investors who hid out in gold lost 28%, while gold stocks lost a whopping 55% on average. So much for the sanctuary of precious metals.
American consumers in 2013 were more upbeat than at any time in the previous six years as views on the economy and the buying climate improved. An improved job market, higher stock prices and rising home values lifted sentiment. The good news is that unemployment continues to decline. This indicator alone tends to stimulate the economic outlook.
As for what’s ahead, bulls and bears are sharply divided as the Fed begins to reduce monetary stimulus. Bulls point to an improving U.S. economy, healthy corporate balance sheets and reasonable valuations, considering low interest rates. Bears take the view that without billions of dollars of stimulus, markets will fall.
The consensus emerging is that 2014 will be a decent year, perhaps returning 8-10%, not far off the long-term average of stocks. But beware….consensus is usually wrong and markets rarely have average years. In fact, since 1926 stocks have rarely returned between 8-10% in any calendar year. Stocks almost always perform better or worse than the experts expect. We expect steeper corrections in 2014 to present good opportunities to add to stocks and to take advantage of depressed bond markets.
It is always tempting to chase gains, but this is where discipline comes in. Is it worth risking a 30-40% correction for a leap at a possible 8-10% gain? Kind of like building a staircase out of legos, eventually the weight of the increased valuations will cause prices to fall as the number of buyers will be outweighed by the number of sellers. Simple supply and demand and a strong case for “buy low, sell high”. As I always preach, beware of greed and fear, as they are the toxic emotions when it comes to managing your money.
Interest rates rose again in December, with the 10-year Treasury surging from 2.75% to 3.04%. This caused long-term government bonds to slump 2.5%, completing a 13% loss for 2013. Investment-grade corporate bonds declined by nearly 2%, while Emerging market bonds continued to languish, shedding over 5% in 2013. Since 1988, there have been two years (three years including 2013) in which investment grade bonds have decreased. In the years following these decreases, such bonds have had double-digit returns the following years. Something to think about, for sure.
High-yield/low-grade bonds gained approximately 5% for the year, but are showing high risk elements. Be careful.