2014 – Observations for the year ahead

December 17, 2013

I’ve stated previously I do not make predictions – no one has been able to consistently predict the economy or its wilder sibling, the equity market.  For that reason, investment strategies are based on long term historical norms and client needs.  However, it’s important to take a look at where we are and how far we’ve come and consider possibilities for the coming year.  The purpose of this exercise is to fully prepare ourselves emotionally for the years ahead of course!

Below are the returns of various market indexes to the end of Nov 30th, 2013:

                                                   2012               1 yr                 5yr                  10yr

S&P TSX –                              7.2%             12.9%             10.9%            8.3%

 S&P 500 US –                       10.9%             36.1%             11.4%             3.4%

MSCI Global Equities           14.0%             35.6%             12.4%             5.8%

Emerging Markets                16.0%             10.9%            13.6%            10.2%

Citigroup World Gov Bond    -0.6%                2.3%             0.6%              2.5%

Salomon Corp Bonds            7.6%              5.3%              6.8%              3.9%

These returns confirm three things to me;

1 – The last 12 months have been meteoric for US and global equities.

2 – Equity markets have “decoupled” from last year and being diversified meant more now than it has for some time.

3 – Fixed income (especially government bonds) was not the place to invest and barely kept pace with inflation.

Considering the year ahead my observations are:

1 – Equities continue to be the investment of choice. Given the returns in US and Global equities, much of the Financial Press and very notable experts (Shiller) are claiming US stocks are overvalued.  They point to the returns experienced, slowing of corporate earnings and employment statistics.  However, although corporate earnings growth will slow from their torrid growth over the last few years, businesses are poised for additional growth in 2014.  Bond prices are likely to decline as we get closer to rising interest rates – which may not happen soon, but are pre-ordained to occur.

There also continues to be a significant amount of cash sitting in bank deposits, not yet committed to stocks, and bond holders are likely to begin selling because rising rates will decrease the market values of their bond holdings.  All this cash will need to find a home and with corporate profits to continue with growing global demand, the likely investment will be equities.

2 – Equity markets never go straight up – be emotionally prepared.  Since 2008-2009, we’ve only had one gut wrenching drop in the markets of around 19% between April and October of 2011.  It seems possible, since this is what equities do – test those of true conviction – that we will experience a run of the mill correction of 5-15% sooner rather than later.

Since 1946, there have been average intra-year declines of around 12-14% and 15-19% hits one year in three.  It is possible we may not see this soon as the early 1990’s years passed without even a 10% correction.

3 – If we don’t experience a correction soon – expect “performance mania”.  If we don’t experience a correction in 2014 and equities continue their growth, we might then experience typical “market froth” later in 2014 or 2015 when everyone becomes an expert equity investor. The focus will then be on chasing performance.  I remember 1998 when the respectable 8-10% returns I achieved in my client portfolios were out shined (for a time!) by JDS returns of 30%!  Equity markets will likely rise rapidly for a time and soon after the bubble will burst.

Jeremy Siegel – The Market is undervalued

Jeremy Siegel is a professor of economics and author of “Stocks for the long run”.  In this article he refutes all of the concerns expressed over continued market growth.

Bottom line – low interest rates, high corporate cash balances and rising net worth will support consumer spending resulting in continued corporate profits and rising share prices.

Click to read more.

How Much is enough?

By ‘how much is enough?’ I mean the amount that will allow you to stop driving so hard professionally should you choose to do so.  I mean the amount that will allow you to feel safe, the amount that will compensate for risking hard-won relationships, the amount that will affirm you’re feeling good, smart, successful, accomplished, in control.”

-Pamela York Klainer, How Much is Enough?

How much is enough?  Author Pamela York Klainer responds to this thought provoking query by writing, “The question is deceptively simple, but the answer is critical to integrating money with other aspects of your life and finding happiness.”

In similar fashion, financial planner Karen Ramsey commented in her book, Everything You Know About Money is Wrong, about the importance of making sure your financial life supports what is most important to you:

“Money will only improve the quality of your life when it is used with clarity.  Only when you learn to spend money in concert with your underlying values—the things that you most deeply care about—will it become a tool for creating a more fulfilling life.”

In other words, money can help you achieve our goals, but financial resources alone cannot produce the essential ingredients of a satisfying and rewarding life such as good health, loving relationships, and meaningful activities.  Keep in mind that the word “rich” has two meanings.  It can be can be defined as “possessing great material wealth,” and it can also be defined as “that which is abundant, meaningful, and significant.”

In his book The Prosperous Retirement, Michael Stein wrote:

“Just as a wagon wheel without spokes will not carry your wagon, money cannot, in itself bring joy, satisfaction, fulfillment, and a sense of balance into your life.  In fact, money sometimes can get in the way of achieving these non-financial goals.”

In addition, it is important to keep in mind that life is multifaceted and that each facet contributes to the quality of life you will experience—now and in the future.

Think of each facet as an integral part of your total “life portfolio,” and remember that it is your investments of time and energy that will make your portfolio grow.  Once you have a clear definition of what “true wealth” means to you, then you can invest in each area of life in a meaningful and purposeful way.

As you consider your life portfolio, ask yourself, “Am I experiencing the ‘return’ that I want and need?”  If not, it’s time to re-evaluate and re-balance how you allocate your limited and precious resources.

Reprinted by permission of Money Quotient, NP

 

“It is never too late to pursue the work that speaks to us from inside ourselves.  Let’s look at that idea the other way around as well.  We are called to recognize our strengths, and it is never too late to hear that call.”

-Deborah P. Block & Lee J. Richmond, Soul Work: Finding the Work You Love, Loving the Work You Have