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A fond Farewell to 2013 Flustered by Finances
Flustered By Finances? Ask Ellen
A Fond Farewell to 2013
Say goodbye to a stellar stock market year! 2013 saw the best one year return for the S&P 500 (total return 32.4%) since 1997 and the best one year return for the Dow since 1995. Both indexes closed the year at record highs, breaking highs set in 2007. The year was surprisingly low in volatility, with few daily price swings greater than 2%. The lower volatility and sharp gains are attributed to Federal Reserve monetary stimulus, record high corporate profit margins, low inflation, low interest rates, stronger housing and auto markets, and improving employment numbers. With each new bull market year (we are now in year #5), our painful 2008 financial crises memories recede. Full-blown market euphoria is not upon us and stock prices are not absurdly high vis-à-vis current interest rate and inflation levels.
December brought a reduction in economic uncertainties. The Fed announced it would begin to taper its bond purchases, i.e., quantitative easing program. The Fed began aggressively buying treasury and mortgage backed securities at the end of 2008, in the midst of the financial crises (purchases increased dramatically and quadrupled the Fed’s assets to $4 trillion.) Beginning in January, the Fed will cut back its monthly purchases from $85 to $75 billion. The market considered this a responsible winding down process and signaled it believes the economy can handle a rise in interest rates and that the Fed is on track to end the easing program. The Fed’s balancing act is tricky, i.e., continuing to support liquidity to prevent recession while unwinding “easy” money to reduce the risk of acceleration towards excessive inflation. Also in December, Congress figured out how to agree on a temporary budget. It’s only for a few months but it made an impact and gives hope that elected officials may realize that teamwork oriented yardage gains can be a lot more effective than one sack after another.
The roll out of the Affordable Care Act was a fiasco. It will take years before we know if the benefits outweigh the costs or vice-versa. It seems healthcare premium costs may have increased for people who don’t qualify for subsidies. But mandated healthcare coverage for everyone, in addition to preventing healthcare induced bankruptcies, may cut costs for everyone down the road. Only time will tell.
No one can accurately predict how the stock market will perform next week, next month or next year. But by maintaining established long-term asset allocations, you avoid getting swept up in irrational market euphoria. Stocks may be overbought in the short-term and we may see either sideways action or a pullback. Nonetheless, stocks are still cheap relative to bonds and stock prices should continue to increase in 2014 and outperform bonds over the next several years. Historically, sustained recoveries have tended to follow extreme contractions, which bodes well for the current environment. Wishing you all a very happy and healthy 2014!
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