Steve Schmitt, CFP, MBA, is Senior Vice President Investment Officer with Wells Fargo Advisors, LLC in Short Hills, N.J. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and separate nonbank affiliate of Wells Fargo & Company, No. 25 in the DiversityInc Top 50.
Many may not remember, but 2013 began in a much different state than it ended. We turned the calendar on 2013 with a worry that the fiscal cliff would not be averted and tax rates, which were increasing for everyone, would crimp consumer spending. Probably the biggest story of the year was that the concerns proved unjustified. With a few minutes left, a last-minute budget deal saved the day and the markets started roaring, never looking back regardless of the many obstacles we faced during 2013. In fact, by the end of the first quarter, even with the much feared sequester occurring (remember that), the Dow Jones Industrial Average and the S&P 500 had finally surpassed their October 2007 highs, reaching many new heights as time progressed. The Dow finished the year with a total gain of 25.4 percent, NASDAQ increased 34.6 percent (not back to 2000 peak levels yet), the S&P 500 went up 29.4 percent, gold fell 27.6 percent and oil rose 5.4 percent.
Holiday cheer came a bit early and was quite an impressive Santa Claus rally with the major averages taking on a significant gain during the final two weeks of the year. The announcement of a two-year budget plan and Fed tapering of monthly bond buying program, combined with an unexpected jump in gross domestic product (GDP) growth of 4.1 percent, was enough to put a smile on Wall Street. Fed Chairman Ben Bernanke’s farewell speech and probably good riddance after his highly tumultuous eight-year tenure as Fed chairman was very well thought out, reasonable and should provide a seamless transition to Janet Yellen. With the decrease in uncertainty over timing of Fed tapering behind us, along with a promise to keep interest rates low potentially through 2017, we are in good shape unless inflation kicks in too rapidly, which doesn’t seem the case thus far. There will continue to be a drag on global economies, ours included, as the financial system is still being reshaped by regulation and weaker than normal credit demand. Even so, equities could perform in the high-single-digit/low-double-digit range for 2014 with fixed income returns continuing to dwindle.
With a brutally cold winter arriving and as the country settles into its coldest winter temperature-wise since 1994, one could draw parallels with the weather pattern of the winter of 1994 to the equity markets and economic cycle we were experiencing that same year. In 1994, the post-recession recovery finally accelerated enough to notch its first expansion greater than 4 percent, and, just like today, the economic expansion was gaining traction. We were in the very beginning stages of a Fed tightening cycle and the markets consolidated a bit before taking off to the moon over the following five-year periodposting double-digit returns year over year from 1995 to 1999. Sound familiar, anyone
As advertised here, the rotation of money from bonds to stocks is under way. According to Barron’s, the portion of household financial assets allocated to bonds has shrunk from 23.5 percent in 2010 to 19 percent last quarter, the lowest since 2008. As of mid-December, nearly $244 billion has been steered into stock funds, the biggest annual flow since 2004. The expectation is for capital to continue flowing from fixed income and gold into equities as the economy improves. Not to mention the trillions in cash still on the sidelines that has not participated in the five-year bull market. We should continue to see flows into late-cycle economic-growth sectors such as industrial companies, cyclical, financials and technology. The stage is set for multiyear economic expansion both domestically and across Europe barring any unforeseen surprises.
2013 was a banner year for real estate across the country. According to Bloomberg, U.S. homes gained $1.9 trillion in total value this year, the biggest jump since 2005. More modest price increases on the order of 3 percent to 5 percent average per year are probably in store for the coming couple years, especially with interest rates expected to remain low.
Stock buybacks and dividend increases from many companies continue to increase in earnest. Perhaps the weakest link continues to be employers’ commitment to hiring and expanding due to continued fear and lack of faith in our current trajectory. Even with cash levels at record levels, the uncertainty continues the hoarding mentality. According to David Kelly, Chief Global Strategist at JPMorgan Funds, there is still $10 trillion dollars sitting in cash accounts obviously earning next to nothing.
As we head into a new year, the script for 2014 seems more hopeful than it did as we entered last year. Don’t be mistakena lot could go wrong next year as investors seem to have forgotten the meaning of risk. Let’s see if the success on Wall Street finally finds its way to Main Street and we move forward with a sustainable recovery for all.