New Year’s Resolutions
2013 was a great year for the average stock investor. The S&P 500 index was up over 29 percent for the year, its best year since 1997. Every major U.S. stock index set a new all-time high in 2013. It was good to be in stocks. That was then, this is now. So, what to do about 2014? Well, here are some things you can do to make 2014 a good year financially.
Keep it Real.
Since 1927, there have been 23 years in which the S&P 500 has risen 20% or more. In the year following, it averaged a further gain of 6.4. But only once has that 20% or more gain year been followed by another year with a 20% or more gain. The odds that 2014 will be like 2013 are not so good. In a recent survey most market strategists expected that in 2014 the S&P 500 will rise to between 1,850 and 1,900 points, a gain of just 2 to 4 percent.
Keep your eye on valuation.
Investors bid up stock prices to all-time highs this year, despite a mediocre economy and corporate profits that were less than spectacular. At the beginning of the year, the price-to-earnings ratio on the S&P 500 was 13.5, meaning investors were paying roughly $13.50 for every $1 of earnings in the S&P 500. Now the S&P 500's P-E ratio is around 17.3. While a P-E ratio of 17.3 won't set off any alarm bells (the historical average is 14.5), it is a lot higher than it was a year ago. The point is that P-E expansion is probably ahead of corporate profit growth. So unless corporate profit margins expand more it is hard to see higher P-E ratios. It's hard to believe that this market can go much higher from here without some serious corporate earnings growth.
Keep your eye on your neighbor and friends.
Don’t get caught up in the hoopla. If your neighbor tells you he just cashed in all his CDs and invested in the market, take note and be very leery. If your hair stylist pitches you on a stock she just bought, start to pull back. Be very wary if people who don’t normally invest in stocks start pouring money into the market. It’s a sign the market is over heated & over invested, which usually means a correction is sure to occur. Pay attention.
Either the stock market is going to go higher or it’s going to go lower. Or it might even do little or nothing. The point is that you’re an investor. You take what the market gives you and it rarely gives you what you want when you want it. From September 2008 to March of 2009 was one of the worst periods ever for the stock market. It was also the buying opportunity of a lifetime. Since 2009 the stock market is up over 170%. The S&P 500 is up over 66% since its last major downturn in 2011. If the market corrects and drops 10% or 20%, don’t freak out. It’s a buying opportunity.
Don’t fall prey to bondage.
Cut your exposure to bonds. Look, I’m a bond guy. I have over 30 years’ experience in the bond markets. We are bond investors. We have to invest in bonds. But it doesn’t mean that I am blind to what I see is going on and what I know is going to happen to bonds. If you own bonds, lighten up your exposure. The 10-year Treasury has broken the 3% barrier. Higher interest rates aren’t coming, they are here. And they are going to get higher. There is an inverse relationship between the direction of interest rates and the direction of the market value of fixed interest rate bonds. If interest rates are going up, the market value of bonds are going down.
My wish for each and every one of you is for a very prosperous New Year!
“It is better to keep quiet and be thought an idiot, than to speak and confirm suspicion.”
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury