Throughout this past year, a bundle of dark clouds started to fade from the economic horizon. It’s duly noted that we are not wild-eyed optimists; we opt for a more pragmatic style. As such, when we see signs of improvement, regardless of the politics surrounding them, we see nothing but trouble for those that refuse to recognize them.
We’ve noted that many people are still holding the lion’s share of their investment capital in cash and the overall sense of the average investor is still gloomy. While we can empathize with them from an emotional point of view, we think these folks will need to acknowledge reality and take advantage of better investment opportunities beyond cash, bonds, and generally pessimistic assets in 2014.
Over the course of the past few years we’ve gone from wringing our hands and worrying about Armageddon to wringing our hands and worrying that stocks are too expensive. While we feel the US equity markets in general are a little pricey, there are still individual names and sectors that are still good values or are “right-priced” rather than expensive. Simply put, we don’t think we are in a bubble just yet.
We talked quite a bit throughout the year about the ongoing Federal Reserve involvement in credit markets. On more than one occasion we openly hoped the Fed would hurry up and get on with their inevitable tapering process. Thankfully Wednesday brought us our first taste of the taper as the Fed relayed they will pull back on $10 billion worth of support each month. This was literally just about the least they could do to get the ball rolling.
The market’s initial reaction was favorable. Now we’ll have to see how well they adjust to a bit less cheap money sloshing around. This will be one of the major stories throughout 2014. We continue to think it will be a good thing and the markets will handle it well.
We feel both the US and European economies will continue to gradually improve throughout the New Year. This may not immediately translate into equity market gains. We usually don’t see a direct correlation between economic growth and equity market performance, but economic growth could lend support to some badly bruised markets. It’s been our experience that favorable investment gains can be had in situations where things go from really bad to less bad and we’ll be looking at Europe and selected emerging markets for opportunities.
2013 will go down in history as a unique year given that the US equity markets did so well while the majority of other asset classes had a truly lackluster year. We do not encourage investors to abandon discipline and chase after any narrow asset class at the expense of exposure to others – no matter how much that might feel right in the temporary moment. In our decades in this role we’ve consistently seen just how badly that ends. Instead, we think there is plenty of opportunity for this past year’s laggards to become next year’s leaders. Momentum matters in the short term, clearly; but diversification will yet again have the greatest permanent benefits.
So we head into 2014 with a sense of guarded optimism. We don’t expect a life of rose petals and peeled grapes but we do think we’re on better economic footing than what we have been in several years.
In this ever-changing world we have no shortage of problems, and fear not, 2014 will bring us plenty of new things to fret. But for a few days we are going to take a break from those worries to truly appreciate and enjoy what matters most – the love of our families and friends. We invite you to do the same.
We were moved by a video clip that was linked to a very nice email a client sent us earlier this week. We wanted to share it with everyone. For those of you who haven’t seen it yet, follow this link to a wonderful holiday “flash mob” performance by the US Air Force Band at the National Air and Space Museum. Enjoy.
https://www.youtube.com/watch?v=gIoSga7tZPg
Have a wonderful Holiday Season and we wish you all the best for 2014 and beyond.
Jeff and Ken
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