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The Sandy Spring Way

January Observations

January 7th, 2014 | By Beau Mercer

FredericBurkeBut now the days grow short; I’m in the autumn of the year; And now I think of my life as vintage wine; from fine old kegs; from the brim to the dregs; And it poured sweet and clear: And It was a very good year.”

—Frank Sinatra- It Was A Very Good Year.

President Obama may have thought that the rollout of the Affordable Care Act was one of the dire predictions of the Mayan Calendar. Seemingly, 2013 was the year of pointless political argument. Nevertheless, 2013 was a terrific year for the stock market despite at least 15 near death experiences!  The stock market, as a leading economic indicator signaled early that the economy was pointed in the right direction. The crowds in the shopping malls indicated that the loud and negative financial media failed to dampen the enthusiasm for holiday shopping. The end-of-the-world-as-we-know-it surprised with the continuing recovery. We began 2013 with a resolve to deal with the consequences of the fiscal cliff and concluded (the year) with the no resolution on the mismatch between government’s spending promises and its willingness to tax. Thanks to zero growth in federal government spending, creditable tax collections and nominal economic growth, the Federal deficit declined to 3.6% of GDP. We begin 2014 with indications that the global stock market has enough confidence to shrug off multiple scary events. The December University of Michigan Survey of Consumer Confidence rose to a five month high. Confidence or sentiment continues to be bolstered by a pickup in employment, higher property values and stock market gains.  By definition, the Goldilocks economy is in place. The economy is not so hot that it causes inflation and not so cold that it causes a recession.

In 2013, the S&P 500 stock index returned 30%, not including dividends. The S&P returns are the best since 1991, when the index returned 30.5%. Currently economic indicators are pointing to continued expansion and growth in the economy, which should help the bull market that started in 2009, continue into 2014. Conversely, fixed income investors had a difficult year. The Barclays Aggregate Bond index, a broad composite of thousands of bonds, fell 2%. Investors in long term bonds were hit even harder, losing 14% of their money since the beginning of the year. Further the Federal Reserve Board has started to taper the bond buying economic stimulus program. Consequently one of larger buyers of bonds will leave the market.

The prevalent explanation for the gains in the 2013 stock market can be summed up by quantitative easing or Fed bond buying. Cause and effect is rarely clear when it comes to the performance of stocks and bonds and yet hope springs eternal. What expectations can be deduced from the investment environment? Is there an obvious strategy that should be followed? The inclination to strategize is hardwired into our genes. The history of the investment markets clearly indicates that careful analysis sometimes runs aground on the shoals of circumstance. Market strategist did not predict 30% returns in 2013 and explanations are wide and spurious. As Mike Tyson once philosophized, “Everyone has a plan till they get punched in the mouth.”  Generally the outlook for the stock market is positive and one should assume that the ‘shot clock’ has not been turned on. The Fed has indicated that it will continue to pursue an accommodative monetary policy which will support investment. There is likelihood of an upward but not significant movement in interest rates. Global economic activity is accelerating, based on GDP growth, employment gains and positive economic indicators. The primary risk in 2014 is geopolitical which was not addressed in the Mayan calendar nor has it been addressed by many market strategists.

Celebrate a great year!

—Fred