Tis the Season! Not just for cheery holiday greetings, warm fires surrounded by families and friends, thoughts of peace on earth, the joy of giving and reflections on the last 12 months, but it’s the season for market forecasts! As you may recall, I don’t make predictions. I spend all of my research and analysis effort on trying to measure value, and identifying those stocks trading well below my estimate of their fair value. This approach has been successful over the years, and is a perfect fit to my temperament and proclivity.
Nonetheless, I sometimes reflect back on my days as an equity market strategist and wonder how it would be to make some predictions again. Would I be credible? Could I be “correct” in my prognostications? Should anyone care what I think about the future?
The good news is that these moments of fancy flee quickly, and I snap back to the reality that almost no one can make accurate predictions consistently enough to make you money. The best way to make money in investing, in my view, is to find an investment approach that works for you, and stick with it. In my experience, the people who struggle most with their investments are those who feel the need to “do something” in response to the latest news. Or forecast…
So, I was reading an outlook report this week that caught my eye. I read a lot of reports each week, and many of them say the same thing. I mostly read them to understand what the consensus expectations are. That way, I can usually assess how each new development fits into this consensus model. Sometimes things happen that surprise everyone.
This report was entitled, “Top 10 Risks for 2014.” Now I am not the most “glass is full” guy around, but this title seemed overly pessimistic, even to me. Are we still carrying deep scars from the 2008-2009 global financial crisis that require constant vitamin E rubdowns from reports like this? Do investors really think that defining risks is the best way to make money in the coming year?
As a counterpoint to whatever negativity you may find out there as we approach the New Year, let me offer my “Top 5 Opportunities for 2014” (wishes, mind you, not forecasts!).
1) The U.S. Federal Reserve learns how to reduce bond buying without crashing the market. This was the big fear earlier in the year: that the Fed would be tightening monetary policy simply by reducing its monthly bond purchases. The idea behind this fear is that the stock market has been grossly inflated by easy money, and that reducing this easy money policy would “take away the punch bowl.” At that time, I argued that tapering was not a move from “easy” to “tight,” but from “super-duper easy” to “super easy.” The stock market’s action this week may be a harbinger of additional good news from the Fed in 2014.
2) Individual investors will stop worrying about “crashes” and begin to invest in stocks with optimistic long-term expectations. This does not mean investors become blinded by greed (like in the tech bubble), but it means they will come to understand the true nature of stocks, and embrace the notion that equities still represent the best long-term, easily tradable investment available to all investors. I understand that some people are still troubled by what happened in 2008-09. I understand that we had a “lost decade” for stock investors. Despite tons of commentary to the contrary, these events did not alter the true nature of stocks – they always go up over time.
3) The U.S. Government will address the nation’s entitlement programs and debt level in a mature and forwarding-looking way. I suspect that most serious investors would applaud any progress on these fronts. I understand that politics may make progress in these matters difficult, but I think the markets would absolutely cheer thoughtful action here. You may say I’m a dreamer, but I’m not the only one…
4) The ingenuity and risk taking of global entrepreneurs will bring forth really cool new products for us to enjoy. Capitalism works as well as it does exactly because people can take risks and get rewarded for it. They can also fail; that’s the “risk” element of the formula. Without venturing out into places unknown, without trying something that no one else has, we can see no progress, no innovation and no fun.
5) Global economic growth and corporate earnings growth will extend the bull market’s lifespan. Analysts are expecting about 10% earnings growth for the S&P 500 next year. Economists see the U.S. growing by roughly 2.5% and the world posting something like 3.5% growth. One could easily conclude that these growth numbers would be positive for the stock market. The average bull market lasts about 4 years. Our current one is approaching its 5th year anniversary. Unless, one considers the huge “correction” of 2011 as a real “bear market”- the S&P 500 was down over 20% (the classic definition of a bear market), intraday, during August of that year. If so, one could argue that the current bull market is only 2.5 years old and has longer to run and higher to fly.
Long may you run. And may you always fly like an eagle.
Here’s to another great year in 2014!