I can’t think of a single money manager or investment adviser who reckoned a year ago that the S&P 500 index would gain 31.3% in 2013, the 5th year of a bull market that was never expected to be so significant or long lasting. So, why trust anyone today to get it right about 2014? They did not understand the momentum that gradually became stronger as the bull market continued year after year, slowing slightly only in 2011. Never mind; 2012, up 16% and up 31% in 2013. It seems like a dream today.
Think of this miracle as the QE market. The Bernanke market, which has been going on as long as the Fed was buying $85 billion of Treasuries and mortgage backed securities a month. The Naysayers who predicted collapse of the dollar in a frenzy of rising inflation, had it all wrong.
It’s best to trust yourself I think to see that the markets were an advance signal that stocks were cheap in an economy where a trillion dollars was being used to drive interest rates lower and stock prices higher each year by the Fed. Think about it. The Dow Jones Industrials have gained 27.4%; the Russell 2000 some 39.4% and believe it or not the small cap stock index, up 42%. It reminds me of the adage that the small caps get battered the worst in a bear market, and beat every other group coming off the bottom.
January, 2014 will be a key signal as last January, 2013 was the best January start in a quarter of a century according to The Reformed Broker, Joshua M. Brown. He wrote that on January 25, 2013. Good on him.
The remarkable fact is that even after this incredible 2013 run-up the S&P 500 index is selling at only 16.65 times estimated 2014 earnings while the Dow industrials are 15.25 times estimated earnings. Reasonable then, at least compared to the new Exotic growth stocks like Facebook, Twitter, Amazon,Ebay,and Apple Computer. This is the glamour cohort of the stock market, which may be running ahead of their earning power or not.
Looking forward then, there are lessons to be learned. First, it might be more prudent to own the indexes than to pick out individual stocks. Warren Buffett has been preaching that doctrine to the public for decades. Don’t try to emulate me for over time you will increase your net worth at less risk by buying the market. Second, just when you think the world is falling apart, because banks are insolvent, housing prices are dropping like boulders in a pond, and unemployment is rising, suggests the market might be close to a bottom. Third, you might just look around the globe and see that Europe is in the doldrums, China’s stock market curiously lacking in optimism. the yen has risen 21% just when some of our hedge funds were going short. Or you might look at the Treasury bond market where yields are edging higher and prices are edging lower.
By comparison America doesn’t look so bad. The fallibility of the political system has not sent stocks roiling despite the healthcare cost mess. There doesn’t seem to be rising inflation from the Fed’s QE policies that have been going on for 5 years as well. The trouble is wee may be getting too comfortable with our magical money making machine, the stock market. We may start taking the expected corporate profits as a given. Even the great Nouriel Roubini sees only “frothiness,” and no stock market bubble for at least two years. Can another two years be in our bull market prognostication. WE journalists are paid to worry
about how the professional money managers can get it so wrong. I see they are mostly talking about another 10% or so in the stock market for 2014. I’d be greatly surprised to see them right, as we haven’t had even a 5% selloff for as long as I can remember.