Paper Chase: 2014 Economy Showing Optimistic Growth
Welcome to the Paper Chase. We all want money. This is what I think about when looking at the market.
2013 Was Awesome
The S&P 500 finished up 29.6% for the year, its highest since 1997. The Dow Jones Industrial Average finished up 26.5% for the year, its highest since 1996. The Nasdaq finished up 38.3% for the year. its highest in thirteen years. The S&P Case-Shiller Home Price Index, which measures actual sales of houses, had its strongest annualized gains in seven years up thirteen percent from last year.
For the first time in 6 years, stocks didn’t rise on the first day of the new year. Thirteen states have adopted legislation to increase their minimum wage.
What to Expect?
Most analysts expect GDP growth of 3% this year. 2014 can’t be as good as 2013 for I feel the 2013 market ate into some of the gains we would have seen in 2014. A double-digit year in market growth would be a surprise, but is not out of the realm of possibility because I believe markets will continue their ascent upwards.
The market will continue to go up because investors feel more comfortable with equities. While interest rates may increase, this has been expected by investors, and money will still be pushed out of bond markets and cash accounts towards equities.
Economies and markets are not always in sync. The economy in 2013 was just OK (structurally no better than the 2012 economy), but diminished risks led to an exceptional year for the market.
We lost too many jobs during the recession, and the economy was not strong even before it began. For those reasons, the nature of this crisis has caused a slower recovery, but we seem to be passed the damage and fiscal headwinds that have hampered growth. Congress raising the debt ceiling without much fanfare will certainly aid in that recovery. 2013 was basically the same as 2012 except it included the end of the payroll tax cut and sequester which slowed growth. We are seeing the housing sector improve, and state and local governments begin to stabilize. With that being said, a 7% unemployment rate is still too high.
While it was a great year for U.S. equities, it was not as good in Europe and emerging markets saw no increase. Valuations are now cheaper in Europe and emerging markets as well. Only 25% of equity exposure in the U.S. is in foreign markets, but 50% of global equity opportunity is in foreign markets.
European economies have struggled for decades, but have seen some recovery. The unemployment rate is still 12%, so Europe still has a long way to go to reach full employment. If Europe continues on the path towards full employment, there is economic growth, earnings growth and equity gains to come out of the region. European stability is pivotal for U.S. equities. This further illustrates the difference between economies and markets. The U.S. economy is solid, but markets may negatively react to turmoil in Europe effecting the fundamentals of our economy.
Asia is also a concern. Combative talk between China and Japan may impact trade in that part of the world.
Effects of Obamacare
The unveiling of Obamacare was botched, but health care costs are growing at their lowest rates in 50 years. We have also seen increased access to health insurance for young people through access to their parents plans until age 26. Its effects on the market, thus far, have been inconclusive.
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