Average advanced 26.5 %. No wonder the U.S. stock market surprised Wall Street strategists along
with the average investor.
The 10 year U.S. Treasury ended 2013 with a 2.99% yield up 127 basis points for the year. High
quality, long maturity bonds posted losses. The 10 year yield averaged 3.49% over the past
decade. We are likely to get there in 2014.
Gold fell 28% over the year. A $4 trillion balance sheet at the U.S. Federal Reserve could not prop
up gold prices in the face of rising interest rates and inflation below 2%.
We began 2013 full of apprehension over the “Sequester”, a 3.9% income tax raise in the top
bracket, plus a payroll tax hike for all earners. In addition, we saw an increase in capital gains and
dividend taxes up to 20 % up from 15 %.
Many were concerned with Europe's recession and implementation of our country's big new social
program "Obamacare".
The Federal Reserve executed an $85 billion per month Quantitative Easing program. After it's
December meeting they announced a tapering of their bond purchases in 2014. Markets rallied after
the news.
The Japanese Ministry of Finance embarked upon their own copy cat QE program
with positive consequences. European bond yields dropped throughout 2013 as Mr. Draghi calmed
markets and the Euro held firm. Both Japanese and EU stocks rallied strongly as their economies
stabilized.
Many investors expressed confusion over how new monetary policies would play out.
Few anticipated the result; losses in long dated bonds in the U.S. and soaring equity prices in
developed markets. We only had a 4 % earning increase for domestic corporations; revenues were
up about 2 %.
Diversified and balanced portfolios underperformed along with Emerging markets. Brazil was down
20.1%, Big Cap China -5.1%, Russia -3.4% and India -4%.
Assets considered safe were losers in 2013 while stocks and risky "Junk bonds” paid off
handsomely. We witnessed a gradual increase in investor confidence even while consumers
remained wary.
Many middle class and low income consumers feel like the country is still in recession as jobs have
not returned in great numbers nor has their income increased. Income inequality has
ironically widened in the past 5 years because of the current Administration's policy choices.
Despite record fines by the DOJ for major banks, no resolution on the Keystone pipeline and little
progress on the U.S. budget impasse, investors still perceived U.S. stock markets as an opportune
place for their idle dollars.
Europe crawled out of recession resulting in late year surges in EU stock markets. Germany for
example finished up 28.6 % in 2013. Japan was up 24.5 % in dollar terms.
The U.S. dollar did not collapse as many feared. After an anemic 5 year climb out of recession the U.S. economy seems capable of growing above 2% with less FED help and a 'do nothing Congress." We continue to expect acceleration in global economic growth in 2014.
Why was the U.S. stock market the belle of the Investor’s Ball in 2013?
Energy independence is the top of my list for good news in 2013. The country has moved closer to a long stated goal with a new technology called horizontal drilling combined with the decade’s old technology called fracking.
Entrepreneurs have made U.S. energy independence possible. Newly discovered gas and oil is located on private land and financed with private money. States that have embraced this type of drilling are North Dakota, Texas, Oklahoma, and Pennsylvania. These areas have witnessed economic booms and filled tax coffers.
One wonders what might happen if CA and NY join in the fun or if the Federal government pursued policies encouraging more drilling. The ensuing job creation would create a much needed increase in personal income, higher tax revenues plus lower trade and budget deficits. We could be freed from defending allies in the Middle East, Europe, and Japan for the purpose of oil security.
Earnings, dividends, and margins for U.S. companies reached record levels, while the P /E ratios for stocks rose at least 2 multiples. We are still below 2000 and 2007 P/E levels. Earnings on the S&P 500 companies will finish around $109 a rise of 4.7 % over 2012.
CEO’s authorized record levels of share buybacks supporting higher share prices.. U.S. corporations have approximately $1.8 Trillion in cash on their balance sheets so more buybacks and dividend increases are expected in 2014..
After such a banner year one seeks a repeat. Rather, we expect a gentler rise. The market is trading at fair value or 15.4 times a rosy $120 forward estimate .U.S. interest rates are likely headed higher as the 3 decade bull market in bonds has run it's course.
Investors wanting more of a good thing will likely allocate marginal dollars towards equities rather than bonds. With no 2014 recession in sight we expect stocks to outperform bonds once again.
Doug Coppola
January 3, 2014
Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.
January 3, 2014
Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.
