After a spectacular year in U.S. stocks markets one might wonder what happens next in 2014, especially as the Federal Reserve continues propping up U.S. Treasury bonds with monetary stimulus. Unfortunately, we don’t have a crystal ball to see the future of our money. Nonetheless, several observations can be made about where we are now in terms of major asset classes from a historical perspective.
Through the end of December, the S&P 500 hadn’t had a ten percent correction for 820 calendar days. This is a rare, but not unprecedented, stretch. Historically, such a correction occurs once per year, according to data from Fidelity. The spectacular momentum aside, one may instead look at valuations such as the price-to-trailing earnings (P/E) measure of the S&P 500. The P/E on the S&P 500 was 19 according to data in the Wall Street Journal at the end of 2013. The historical average P/E ratio is closer to 16. While the current ratio may appear high, it is not unusual for the ratio to go much higher, especially in a strong bullish cycle. Several factors– including better-than-expected earnings growth, multiples expansion and retail demand– could still make broad indices go higher. Based on forward earnings, the P/E ratio is lower at 15 to 17 times earnings, depending on the measure for earnings used. Analysts, however, have a notorious history of being optimists. 2014, nonetheless, could be a good year for stocks.
The broad bond market, as represented by the Barclays US Aggregate Index, suffered a 2-percent decline in 2013, as rates rose after nearly 30 years of a great bull market in bonds. No one had expected the rise in rates that picked up at the end of May. While going forward, the level of interest rates will likely normalize, especially as the Federal Reserve takes its foot off the pedal of stimulus. 2014 may not be a repeat performance of 2013 for bonds, as negative (back-to-back) calendar years in the bond market have not been frequent. Nevertheless, a long bull market does take a while to unwind itself, and this is new territory for all kinds of investors. It may be awhile before rates stop rising which could lead to more losses for bond prices.
While gold had luster for many years, 2013 saw prices fall. Gold lost 28% during 2013. Many theories abound as to what determines the value of gold, but empirical data supporting these theories aren’t yet robust. As John Bogle, founder of the Vanguard Group, Inc., said in a 2011 interview, gold “has no internal rate of return” and “is the ultimate speculative investment.” We believe his thoughts on the subject sum up ours.
Wall Street strategists make the same set of forecasts every year. We try to remain educated about what can and cannot happen. Some will be right, some will be wrong, some will get the direction right, but the extent of it wrong. Despite the fallibility of these prognosticators, we love to listen to what they have to say.
We lean on history to offer some perspective about the future and rely on tried and true principles of investing such as diversification and time horizon management to align investments with your goals. Happy investing!
W.J. Rossi, CFP, ChFC, is a partner at Koss Olinger Consulting, LLC. in Gainesville, Fla.
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