News & Info

Quarterly Client Letter

It seems that each year brings new terminology. A buzz word or phrase that the media latches onto. 2013 proved to be no different as the financial world latched onto Political Fatigue. When we reflect on the political events that occurred throughout the year, Political Fatigueis an appropriate term.

We began the year with a last minute, or more accurately, overtime compromise to avoid the fiscal cliff. Next came the implementation of the sequester. May and June brought discussions of the reduction of Quantitative Easing. We were welcomed into fall with a government shutdown and closed out the year with the less than efficient rollout of the Affordable Healthcare Act. Sprinkle in mentions of the NSA, Snowden and the invasion of privacy and just keeping up, much less analyzing the events, becomes an arduous task.

When you review a chart of the performance of the S&P 500 overlaid on the events of the year, it becomes apparent that the political posturing of recent years has caused the market to reach a point of Political Fatigue. With each political spectacle in 2013 the financial markets responded with a quick knee jerk reaction that quickly subsided.

Even when we take the financial market’s reaction to political events into consideration we see that 2013 had very little negative volatility within domestic equity markets. While the economy did end the year on better footing than it began, many question whether or not the phenomenal growth in the domestic equity markets outpaced the advances in the economy.

From a broad financial market perspective, 2013 was an interesting year. While the domestic equity markets produced double digit returns not seen since the late 1990s, other asset classes didn’t fare as well. Developed market countries ultimately provided very good returns, though they lagged the US, but did so with significantly more negative volatility. Emerging market countries encountered significant volatility and remained negative throughout the year. Lastly the US fixed income markets, which many retired clients depend on, fell negative in May and broadly continued the decline through the balance of the year. So where does this leave us moving forward?

We enter 2014 with a US economy that continues to strengthen, domestic equity markets that continue to establish new highs and a FED that finally has enough confidence in the strength of the economy to pull back (taper) on monetary stimulus. In addition, barring any unforeseen issues, we should see less drag imposed on the economy via Washington in 2014.

Over the medium and potentially long term we see the energy boom within the US having a strongly positive impact on the US economy and equity markets. Not only are we on the path toward energy independence, but we have begun to see early signs of manufacturing jobs returning to the US as our energy advantage provides cost efficiencies for manufacturers. As this develops we should see improvements in employment figures, a reduction in our trade deficit and improvement in GDP. In addition without the dependence on the oil in the Middle East, we expect a reduction in the amount of government resources that are allocated to that region.

While we are optimistic as we enter 2014 we do see areas of concern. The FED is now in the early stages of unwinding the most aggressive monetary policy in history. It was mentioned in a recent conference call that, “Watching unconventional monetary policy is like watching a TV commercial for a new drug. Some positive effects with a long disclaimer of nasty side affects.” At this point many of these “side affects” are unknown. It is very unlikely that the unwinding process will progress seamlessly. We have also begun to see individual investors seek riskier assets in an effort to obtain additional returns. While this trend provides additional fuel to appreciating markets, it exacerbates downturns as many of these same investors flee when negative volatility returns. Lastly, we have seen several years of positive profit growth. While there is generally room for profits to inch higher, we anticipate a tougher road in 2014.

If we were to summarize our outlook for 2014 in a single sentence it would be as follows: We expect increased volatility and lower returns, albeit positive returns for the coming year.

As always, should you have any questions or if you would like to schedule a time to discuss your portfolio, please don’t hesitate to call. We thank you for the privilege to be of continued service.

 


Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed, and the accuracy of the information should be independently verified. It is our goal to help investors by identifying changing market conditions; however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market. The views expressed reflect the opinions of the author and do not necessarily reflect the views of SagePoint Financial, Inc. The S&P 500 is an unmanaged index generally representative of the U.S. stock market and cannot be invested in directly.


Archives of Past Quarterly Client Letters