Having just celebrated the fifth anniversary of end of the 2008-2009 bear market, there is plenty of commentary in the public domain about what happens next. Based on historical perspective and current conditions, arguments are being made about both a bearish case and a bullish case. While these arguments are helpful in recognizing the primary issues impacting markets, the real important objective – regardless of the path forward – is to not let your emotions rule. Investing is a long-term proposition with many peaks and valleys and it is naïve to expect otherwise.
Having advanced over 170% during this five-year span to set new all-time highs (save the NASDAQ Composite) U.S. large cap stocks have performed very well. How much of this recovery came from extremely accommodative monetary policy versus actual improvement in corporate fundamentals is impossible to know, but both definitely had a role. Needless to say, it is unlikely (although not impossible) for stocks to provide equal returns over the next several years. That does not mean respectable returns are not possible; they are, but the primary driver of the results has changed. We are at the point in this market cycle where fundamentals – not monetary policy – must provide the major catalyst. From published commentary the Federal Reserve has made it fairly clear they are winding down quantitative easing absent a sustained contraction in U.S. economic activity.
As we look at data early in 2014, the harsh winter much of the country has experienced has had a noticeable impact on economic trends. In January and February much of the data for December and January came in much weaker than projected. So far the data for February has been a little better than forecast albeit against more subdued expectations. Thus the underlying momentum in the economy remains unclear, meaning upcoming data will take on even more significance as investors gauge the true strength of the economic growth. We will be watching closely for clear trends to emerge.
Finally a comment on gold.… We pointed out earlier this year that gold had rallied to begin the year after falling by over 30% from its October 2012 peak. As of this date the positive price trend has continued with gold now up over 11% for the year. We think there are several underlying issues that have made this rally possible. First, uncertainties regarding Chinese monetary policy and potential domestic credit issues have driven Chinese households to purchase more quantities of physical gold than they have in the past. Second, hints of underlying deflation in Europe have traders speculating the Central Bank of Europe will soften monetary policy to help spur exports and thus growth. Finally, the weaker-than-forecast U.S. data have some investors contemplating the pace of tapering. All three of these issues are bullish for gold prices at least in the near-term but in general we think the long bull market in gold may have run its course.
More thoughts next week, talk with you then.
Chief Investment Officer