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.