With the question of whether or not the Fed will start tapering out of the way, MoneyShow’s Tom Aspray turns his focus towards what’s in store for market participants in the new year.
The FOMC caught many by surprise last Wednesday, myself included, as stock prices exploded to the upside and closed with impressive gains. It appears that the FOMC struck a good medium between slightly reducing their bond buying and declaring their plan to keep rates low for quite some time.
My argument last week was that the threat of deflation would keep the Fed from acting. Obviously, it did not, though Mr. Bernanke did comment that “The committee is determined to avoid inflation that is too low, as well as inflation that is too high.”
As we enter 2014, I think deflation will continue to be a concern for the advanced countries. The chart last week from the WSJ shows that inflation for all OECD countries is in a well-established downtrend, and in most countries, well below their central bank’s targets.
If the S&P 500 were to correct sharply in the last two weeks of the year and drop 5%, the Spyder Trust (SPY) would still be up over 24% for the year. This has given many money mangers fits as at the end of the 3rd quarter, the average hedge fund was only up about 6%. Since many charge a management fee of 2%, facing their clients after this kind of year won’t be pleasant.
No matter what happens in the last two weeks of the year, 2013 will clearly stand out as a buy-and-hold year with index funds as the star performers. The iShares Russell 2000 Index (IWM) is currently up 34.1% YTD, followed closely by the 33% gain in the PowerShares QQQ Trust (QQQ).
Both have done significantly better than the Spyder Trust (SPY), which is up 29.32%, and the 26.52% gain in the SPDR Dow Industrials (DIA). But will buy and hold work again in 2014?
The chart above shows the percentage performance of the Spyder Trust (SPY) since 2012 when it was up 16% for the year. In 2012, there were two significant corrections. In April, it was up 11.5% for the year before it dropped 11.2%. This almost erased all of the year’s gains and likely took many out of the market.
By the middle of September 2012, the SPY was up 15.8% for the year but promptly gave back 9.8% of this gain in the post-election decline. The chart shows that 2013 was a much different year as after being up 32.5% in May (since 2012), the SPY has its worst correction as it dropped 6.4% from high to low.
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There was another correction in August as well as from the mid-September to early October as the government shutdown spooked investors. The uptrend in SPY has been much clearer in 2013 than it was in 2012. The break of the uptrend from the late 2012 lows in October 2013 was very brief.
Three or more years of consecutive double-digit gains in the S&P 500 are quite rare. Since 1975, there has been only one example. From 1995 through 1998, the S&P 500 had gains of 34.1%, 20.2%, 31%, and 26.7%. There were corrections during these years with the most notable being the 22% drop in 1998 before the S&P rallied 33.7% from the October lows to finish the year strong.
Given what I see as the continued improvement in the economy in 2014, I think double-digit gains are again likely in 2014 but the evidence is not nearly as strong as it was last year. I do not expect a smooth ride like 2013 as I think we will see more sharp corrections in 2014.
This will make it difficult for new investors since if we reach double-digit gains in the first half of the year, I think investors will need to be prepared for a significant correction. If we, instead, get a decent correction early in the year, it should present a good buying opportunity.
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