HAPPY NEW YEAR! The fourth quarter certainly saw to it that investors would have reasons to celebrate!
Last year around this time, I predicted that the markets would post a positive return of less than 10% in 2013. The Dow started the year at 13,105.37, and it set new highs in March 2013 and then topped those highs in November 2013, establishing a new vision of how volatile market corrections are in this era. From falling as low as 6,547 in 2009 to ending 2013 at 16,575, the amount of money moving is topped only by the amount of misconception and misinformation toward conventional wisdoms like "buy & hold" and newfangled mentality of day-trading. Then there's the whole 99% issue, but that is not worth analyzing on this platform (albeit, it is relevant in an full analysis of the volatility in modern market swings).
When predicting market conditions for the forthcoming year, there are only four categories that I recognize: 1) up more than 10%, 2) up less than 10%, 3) down less than 10%, and 4) down more than 10%. Splitting hairs any further is missing the point of investing because it is a long-term event, so any singular year means about the same as any given half-mile of a marathon. In fact, the only reason I make annual predictions is for fun. I rarely (if ever) tweak my investment strategy based on the next 12 months.
That said, I predict another year of returns above 10% in 2014 (although, down from this year). Both the Dow and the S&P 500 were up over 25% in 2013, which leaves virtually nowhere to go but down, but there's a lot of room between 25% returns and negative returns on the year. I doubt that we can see another year of 25% returns (and, in many ways, I hope we will not), but there is no guarantee that the markets will retreat from here in the next 12 months. The bond market seems ready for its long-expected collapse (which, at this point, may only be a retreat) and money markets still pay 0%, so there is still no incentive to invest in stock alternatives. While "dumb money" is not a term that I'm particularly fond of, "never underestimate the predictability of stupidity" is one of my favorite movie quotes (Snatch., 2000). Chasing returns is a common human error. The likelihood of money coming out of precious metals (which were down about 35% this year, including gold) and bonds into stocks is strong, and there is plenty of money left in those investments to move the markets higher.
Consider gold investors who became convinced that the stock market would drop quickly like it did in 2008 (as if the market were directly correlated to the President's approval rating, which I'm convinced some people think is somewhat true). Assume that they do not check their balances regularly and only review year-end reports. They are going to see their portfolio lost 35% of their starting investment this year, and then they will notice that most stock funds returned 20-40% (maybe more). Presumably, they invested in gold because they have a low risk tolerance (case in point, they were talked into investing in gold on the fear that the stock market would tank). Losing a quarter of their investment is not going to be something they can stomach, and their money will come right back into the stock market. The question is how many of these investors are out there.
Incidentally, if the markets returned exactly 10% in 2014, then the Dow will close at 18,234 next year.
