After a year that saw an incredible rally across the board, we all have to collect our thoughts and analyze how we as investors choose to proceed in this continuously uncertain market. That being said, last year was one filled with immense economic uncertainty, however there was a decidedly bullish roar to the markets. Because it is not prudent analysis to pinpoint exact causes of market movement, we will recognize forces that drove the market to new highs seemingly every week and brought us to where we are. To begin with, operation Fed to the rescue has ensured that interest rates remained at rock bottom for most of the year. While arguable, it is almost certain that the bond buying program and accommodating monetary policy nudged the market higher and precipitated most, if not all, of the other reasons being discussed today. Interest rates have been the driver for the resurgence in US housing recovery and the increased consumer confidence accompanying and its affects have spread to company's bottom lines and stock prices.
The fundamentalists approach to stock valuations give weight to earnings capacity and growth, by most accounts we have seen such growth and potential in the stock market in 2013 causing the major indexes to rise by double digits. Further market growth was fueled by easy comps from an environment with tepid growth in 2012, and continued expense and cost cutting measures by companies. In short, it looks like we hit the stride of this bull market in 2013. In many respects, if you let the uncertainty that was rampant in the economy deter you from pushing that buy button, then you missed out on some serious coin. But few would blame you, the US at times looked like the politicians were out to destroy an already feeble economy, Chinese growth was still a big question mark and the Euro Zone had more than its share of economic woes. Needless to say, investors came out of the year alive, and stronger than they've been in the last five years. Economies returned to growth and all was well in the world, or so it would seem. If nothing, this year should strengthen everyone's belief in the stock market as the greatest wealth creator in the world.
But that was then, perhaps investors who have been apprehensive should remain so, at least for the near term. Signs of an exhausted market are afoot. Perhaps we have reached a point where the economy needs to catch up to the capital markets, or maybe this bull of a market is gearing up before it begins to charge onto the next rally. But consider one simple metric that historians and analysts have used to determine market exhaustion for decades. Today January 22 2014, the S&P 500 index has a Price to Earnings ratio of 18.91 compared to a historic average of less than 16. Perhaps not incredible expensive, but it should be cause for reconsideration. the market is known to have inflection points and mild corrections around these PE ratios. It is by no means an indicator of a reversal of this great bull market, rather I consider it to be a sign of market fatigue which will give the real economy a chance to catch up with the market, i.e job creation, top line growth and long term capital investments.
Of course all future considerations will have to be viewed with the consideration of the Federal reserves interest rate manipulation. It is market consensus that this recovery should take stride this year and be accompanied by rising interest rates. This gives way to a weaker bond market and perhaps a hum drum stock market.
There are always bargain opportunities in any markets, look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right.
If there's one thing I learnt from 2013 it's that there has been a shift in paradigm, we are now investing in an economy that is in a permanent state of uncertainty, apprehensiveness will never get results, rather patience and conviction in execution will serve the best investors.
Stay tuned for more
Till then - Trade Well-
F.
