First Quarter Thoughts

Happy 2014!  Before we focus on the New Year’s Dip, let’s spend a moment enjoying the rewards of 2013.

The Russell 3000 returned 33.55% with the best of the major sectors, the Russell 2000 Growth index, at 43.30% and the worst, the Russell 1000 Value index at a respectable 32.53%. In the less published sectors the Russell Micro Cap index gained 45.62% and the lowest return of the Russell indices we track was 29.16% on the Russell Top 50 Mega Cap index.

It was a very good year for US and International Developed equity markets but not so much for bonds, commodities, REITs, and emerging markets.  The fundamentals supported this rally – employment, housing, GDP growth, consumer spending, and manufacturing all reported healthy gains.  Q4 earnings look great – almost 80% of the companies reported to date have exceeded expectations.

The Fed is moving forward with the stimulus tapering; starting in January they began reducing monthly bond purchases by $10B, with $65B monthly purchases still in place.  Their December announcement confirmed what investors indicated throughout the year as they unwound their Great Recession trades – the ICI reported 2013 cash flows out of fixed income funds ($81B) and into equity funds ($19B) – more good news for equities.

Global economic growth is improving, if anemic.  There is much discussion among the prognosticators that better values lie in international developed markets.  I am a 30 year global veteran and I am willing to take currency risk when fundamentals indicate that’s a good idea.  I am not convinced now is the time to buy Non$ equities.  With the Fed tightening while Europe and Japan ease, the US could lead the recovery and cash could flow back to the greenback from international positions.  Stay tuned.

I am most cautious about the consumer, who drives the economy at two thirds of GDP.  Income growth has stalled due to high unemployment and this is one indicator that needs to improve.  It’s not enough for the employment numbers to improve, which they have, because they obfuscate reality.  The data omits the many who have dropped out of the labor force – the labor participation rate is at 1980’s levels.  That is troubling and a turnaround on that data is at the top of my wish list for equity markets in 2014.

The risks to 2014 have already begun to emerge.  Pun intended.  Emerging markets are in a freefall and although strategists have been recommending them over the past several months, well before this latest drubbing, I am often dubious of the long term opportunities despite the occasional newsworthy euphoria.  I rarely see enough of a positive impact to justify the risks.

Q4 returns are:  Russell 3000 @ 10.1%, EAFE @ 5.7%, and the BarCap Aggregate @ -0.1%.

2013 returns are:  Russell 3000 @ 33.6%, EAFE @ 22.8%, and the BarCap Agg @ -2.0%

All good wishes for a happy, healthy and prosperous 2014!

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