This article was originally published on TheStreet.com on December 30, 2013 at 5:45am
But how helpful have these warnings been in the past? Was it “right” to be fearful the U.S. and global economic recoveries would be slow and unsteady; that unemployment would still be as high as it is five years later; that unprecedented intervention by the Federal Reserve would put us in uncharted territory as far as inflation and currency risk?
Without question it’s been “right” to be fearful — but was it right, in retrospect, to act upon your fears?
2013 In Review
One year ago it was the fiscal cliff — the return of higher tax rates on income, dividends and capital gains, not to mention the much-maligned sequester and the damage that would be done to both consumer and corporate spending. The unemployment rate was measured at 7.8% a year ago, but most everyone was focused on the under-employment rate.
According to the U.S. Bureau of Economic Analysis, consumer expenditures on major items were up every single month this year. Spending among Americans in January was higher than spending in any month during 2012.
On the corporate side we saw companies begin to deploy their massive cash hoards this year. In addition to buying back their own stock, corporations spent on technology (just take a look at how the Nasdaq fared this year) and other capital goods.
Improvements in labor, housing and the stock markets — and the associated “wealth effect” — have led to increased consumer demand for new automobiles, homes and clothing. This, in turn, has led to an increase in demand by corporations for the materials needed to manufacture and deliver automobiles, homes and clothing. According to Bloomberg, “Orders for long-lasting goods such as computers and machinery climbed in November by the most in 10 months…”
Fear that proposed tax hikes could put our recovery in jeopardy, or that the employment picture was being falsely represented may have kept you out of the market this year. The S&P 500 is up 26% and the Dow Jones Industrial Average 23% through Friday’s close. The real fear in 2013, which many portfolio managers and hedge funds are now facing, was being underinvested.
2012 In Review
Two years ago there was serious concern the U.S. was becoming Greece, which was in the process of becoming bankrupt. Obama’s first term was nearing its end and each party’s fight for the presidency seemed to trump millions of Americans’ fight for a job. In August 2011, amid our government’s inability to govern and a fiery debt ceiling debate, Standard & Poor’s downgraded the United States’ credit rating from AAA for the first time in history, to AA+.
We all know how this story played out: Yields on our debt actually declined as the downgrade-inspired fear caused a flight to safety. But two years ago there was a legitimate and palpable concern we would not get our act together.
The fear going into 2012 was our ever-expanding budget deficit and our economy’s prospective inability to get people working (and spending). The S&P 500 was up 14.51% and the Dow 8% for the year; long-dated Treasury Bonds were up over 33% thanks to the aforementioned fears. The unemployment rate at the end of 2011 was still 8.5%, though very few believed it was headed lower at the time.
2011 In Review
Three years ago the concern was the European Union was doomed — at least one of its members was certainly headed for insolvency and Germany wasn’t going to take it anymore. Despite the fact that our stock market had bounced nearly 100% from the March 2009 bottom, the DJIA was at 11,600, well below its October 2007 high north of 14,000.
Our recovery was shaky at best at that point, and both residential and commercial real estate prices were still falling. If you had excellent credit and were looking to buy a new home at the end of 2010, your bank was at least polite in telling you “No.” Things were really not looking good. While headlines warned that another recession was possible, it was clear to just about everyone that we were still in one.
The fear going into 2011 was that our stock market was merely experiencing a dead-cat bounce, and that we were headed straight back down for something far worse than 2008-2009. The S&P 500 finished the year down 1%, the DJIA up 5% and nationwide unemployment was at 9.3%.
2014 In Focus
Today both the S&P 500 and DJIA sit at all-time highs; unemployment has most recently been measured at 7% and is clearly trending lower; the credit markets are still thawing, despite rates sneaking slowly higher; and seldom is heard a discouraging word from Europe or China. Add to that the price at the pump is at its lowest in three years.
There aren’t too many left claiming the recovery isn’t for real. There are a few who still think the dollar is on its way to obsolescence and are trading theirs for gold. My guess is there will be even fewer a year from now.
So what’s the primary fear today? Is it that the Federal Reserve will somehow botch its exit from our bond markets? Maybe, although we got a positive preview last week when the Fed announced its decision to begin tapering. Not only did the stock market not fold at the prospect of moderately rising rates, it advanced convincingly. The 10-year Treasury is right at the 3% mark today and all is well.
Perhaps the fear is that the best of this bull market is behind us. If you haven’t participated in the unprecedented four-year rally, it may feel risky or even foolish to jump in now.
So What Could Go Right in 2014?
There is fear that 2013 didn’t bring any meaningful corrections — we must be “due” for one. Maybe that is the very fear that will keep some investors sidelined, again, in 2014. And as long as there are still investors on the sidelines, we likely haven’t reached the end of this bull market.
Have a Happy New Year!
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
You can find Adam Scott’s profile on TheStreet.com here.