Making predictions is a lot like being a home run hitter. Every so often you hit one out of the park, but in between homers, you strike out a lot. I used to write an end of the year article that outlined what I felt was going to happen in the economy and financial markets in the coming year. Occasionally I would be right about some things, but mostly I struck out. So instead of trying to predict what will happen in 2014, let’s instead focus on things that we know as we head into the next year.
1.) We are closing out the fourth year of an economic expansion, though it has been a long, slow slog. During this time, GDP has grown at under 3% per year which isn’t enough growth to create many jobs. A typical economic expansion lasts around 4 years, but a typical expansion also produces growth rates higher than 3%.
2.) The Federal Reserve continues to pump money into the economy and interest rates are continuing to hover at historically low levels. This is good for borrowers but lousy for savers. The Fed has also hinted at tapering the amount of money they are going to pump into the system. There is no set policy or timetable established, but the mere hinting of this sent interest rates up in the early summer of 2013.
3.) The stock market is hovering near an all-time high. Not that it means anything. When I started as a financial advisor in 1986, the Dow Jones Industrial Average was around 2000, so I’ve seen all sorts of all-time highs in the last 27 years. In terms of valuations and corporate balance sheet strength, stock prices are not overpriced. They aren’t necessarily underpriced, but we aren’t sitting on an overvaluation bubble.
4.) The unemployment rate is at 7%, which is on the high end of historical norms. The number of people in the workforce is also at a very low point that we haven’t seen since 1969. Wages have not risen significantly here in the U.S. for the past ten years and don’t appear to be heading higher anytime soon. Like any other commodity, when the supply of labor exceeds demand, then the cost of labor (wages) won’t rise.
5.) Our federal government is still as dysfunctional as ever. In addition, 2014 is a mid-term election year so all of the House of Representatives are running for re-election as well as a number of Senators. Generally in an election year, little, if anything, in Congress gets accomplished.
Are there any logical conclusions that we can draw from these things that we know? Not really. Because what we know isn’t the whole picture. In 2014, there may be a lot of things to pop up that will raise the blood pressure and anxiety level of investors and cause them to make irrational decisions. We, on the other hand will maintain our strategy of utilizing a diversified portfolio of asset classes and investments along with scheduled rebalancing and a long term perspective to move us another year closer to our goals.
Happy New Year!
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2013 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
