Reviewing the Financial Markets for 2013 and Looking Ahead to 2014
There is no need to wait until December 31st to review the performance of the stock and bond markets for 2013; there is already plenty to talk about and even more to prepare for going forward. Over the last six months, the majority of the inquiries I have had from friends, clients and colleagues have focused on the question "when should I get into the stock market?" The question was not unexpected as the stock market has continued to set records for new higher prices week after week. The answer is not simple and in fact varies widely from person to person. Relying on the axiom, “A picture is worth a thousand words,” take a look at the chart below courtesy of bigcharts.com.
The chart recaps the price activity of the benchmark Dow Jones Industrial Average for the year 2013 up to mid-November. The second chart is a volume chart which sketches daily trading volume of the 30 Industrial stocks in the index. The third chart is a divergence chart which shows how prices have remained above the moving average price for almost the entire year. Although, you can see some brief slippage in September/October as the US Government decided to shut down once again, causing havoc amongst investors.
The bond market has had major price swings in both directions, largely due to the uncertainty of FED policy in the wake of Bernanke's pending departure, and again as a result of the Federal government failing to act responsibly on many fronts. The bond market will reflect FED policy directly, and all indications are for very little change in that policy in the near term.
What can we expect to see going forward based on everything in the recent past? A closer look at the stock market chart reveals a quick break back in prices after each new high plateau. In May, July, September and October we see new market highs and then a swift retreat, only to rebound once again. Experience over the years says that this type of price action is reflective of growing concerns about the sustainability of the high price levels. So each time new record prices are recorded, many investors quickly sell trying to take some profits out of the market before any price debacle could occur.
The problem thus far, has been that many, if not most, investors are not even in the market and continue to remain extremely cautious. If you recall over the last several years, I have advocated continually having some exposure to the stock market in our portfolios. With the help of investment advisory professionals, some people have selected stocks which have outperformed the market in general, and also allowed them to maintain some exposure to stocks. Over the course of the last ten years, stocks have continued to provide a better return than bonds. However, these better stock returns come at the expense of much greater volatility, and the need for investors to understand and accept wide swings along the way.
Traditionally, as we approach retirement, it has been recommended that our investments move from more highly volatile stocks to less volatile bonds in order to insure the preservation of capital during the years we need it most. While this is a logical approach, many people make the transition way too early in their investing lives. They become ultra conservative, especially after market debacles such as we had in 2008. While this is understandable, it does not help to improve overall investment returns. Again, this is where a professional advisor can give guidance and balance.
What can we expect going forward? While I am at the same disadvantage as most investors, I can say that based on historical perspectives, it looks like we are in for the same kind of performance over the next six months as we have experienced over the last six months. There are no looming changes in the Federal budget picture; our job growth, although slow, continues to inch forward. The performance of corporate America continues to improve by way of better earnings per share and increasing sales revenues.
Given this scenario, a cautious approach is still warranted. However, cautious does not mean inactive or non-participatory. Take advantage of holiday bonuses, gifts from parents and grandparents, and even taking some profits in shares you have held for some time (look to the income tax laws for special benefits when selling stocks held for one year or more) to increase the holdings in your portfolio. Too often these unexpected cash infusions are quickly spent and months later we have a hard time remembering what we bought. In my opinion, if we allocate some portion of any unexpected cash flows to further building our nest egg, we have taken a large step toward financial independence.
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©Patrick J. Catania 2013
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.