This week’s Update contains one of our favorite quotes having to do with the future. Always undaunted, we put our “two cents” forward about 2014 in the attached.
Keen, regular readers of this missive will recognize both the quote and the optimism from our previous efforts.
Regardless of whether we prove to be right or wrong, we sincerely hope that 2014 is the best year ever in every respect for you, your loved ones, and the causes you care most about.
Our best,
Lee and Jeremy
PS- Feel frees to share this Update with other friends or family; it’s our pleasure! –L&J
This Week’s Quote:
“The only limit to our realization of tomorrow will be our doubts of today. Let us move forward with strong and active faith.” ~ Franklin D. Roosevelt
JL Davis Thoughts This Week:
The 32nd President of the United States uttered this week’s quote in the 1930’s, but his sentiments speak to what we see for 2014. Moving forward with “strong and active faith” might just be rewarded this year. Following are our views for the upcoming year.
Much like the 7th inning of a fine baseball game, the remarkable growth in the U.S. economy and markets dating back to March of 2009 is now in rare territory in terms of the length of the cycle. Since dropping to a bear market low on in March of 2009, the S&P 500 stock index has gained +202.8% as of 12/31/13, and is now in the 5th longest stretch in the last 50 years without a 10% or greater drop. We think it goes a bit further in 2014.
However, some recent economic data has declined a little, though still in good territory. Home sales have cooled a bit from their October highs as one might expect with mortgage rates rising modestly. We think home sales are likely to rise from here. Consumer spending remains strong and is a primary driver of what we expect to be a good U.S. economy in 2014.
We believe short and long term interest rates will rise somewhat, not a lot, in 2014. In his recent comments, outgoing Federal Reserve Chairman Bernanke said he “expects rates to remain at near zero for a considerable time,” a sentiment not echoed by everyone on the Fed board. Incoming Fed Chairman Janet Yellen was confirmed by the Senate yesterday—her stated views are quite similar. Though short term interest rates are likely to stay at current levels, we see long term rates such as mortgage loans moving slightly higher this year.
As for inflation, we don’t think there will be much. In fact, with much of the European economy teetering on actual deflation and parts of Asia (read China) slowing a bit, we expect no significant inflationary increases domestically or internationally in 2014.
We believe that markets always, always follow corporate earnings, which we expect to continue to be strong worldwide and especially in the U.S. in 2014. We believe that stocks will do well, but less well than 2013’s stellar performance.
We see continuing challenges for bonds, and believe that the recent outflows from bond mutual funds are likely to continue. The 30 year excellent run in bond based investment performance appears at an end at least for 2014. We see alternative strategies and hedging risk as a necessity in fixed income investing this year.
Real estate continued to cool as an asset class last year and we see no signs of a change there. Commercial real estate domestically and internationally seems to us to be fully priced at this time, so yields to investors look to be very modest to us presently.
Commodities, especially gold, merit a warning sign in 2014. A little history: After gold peaked in value in the early 80’s and began a steady decline, it took 28 years to get back to that level. We think commodities, particularly metals, are headed a bit lower this year, though if industrial demand picks up, the scenario changes.
So to sum it up, we are optimistic about 2014 in terms of the economy and markets. We plan to “move forward with strong and active faith” and suggest you do the same!**
Market Week: January 6, 2014
The Markets
Equities rang in the new year by taking a bit of a breather. As investors decided to take some of the profits that the Santa Claus rally had left in their stockings, the Dow lost 135 points on 2014's first trading day, though it regained much of that the following day. The other three domestic indices fared slightly worse, though not as badly as the Global Dow. Meanwhile, gold showed signs of new life after its disastrous 2013, jumping nearly 3% in the first two days of the year.
Last Week's Headlines
• Home prices rose 0.2% in October, putting them 13.6% higher than 12 months earlier. The year-over-year gain in the S&P/Case-Shiller 20-City Composite Index was the strongest since February 2006, and October's monthly increase represents the 17th straight month of gains. However, S&P warned that the monthly increases were showing signs of slowing.
• Construction spending was up 1% in November, according to the Commerce Department, and was almost 6% higher than the previous November. Strength in both residential and nonresidential private construction fueled the growth as spending on public works projects fell 1.8% during the month.
Eye on the Week Ahead
Last week's light trading volumes should be back to normal this week, and those who believe that the first five trading days of January indicate something about equities' subsequent direction during the coming year will have a better basis for making that assessment. Friday's jobs numbers will be of interest, as always, as will the minutes of the meeting at which the Fed's monetary policy committee decided to start tapering.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprices.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014
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