This past year taught me that the investment markets can stay irrational way longer than many would have imagined; you’d be hard pressed to find any analyst or market pundit who predicted double-digit returns for 2013. The reality is that the markets were driven all year by government/central bank intervention across the globe, which is much harder to predict, as opposed to analyzing normal market fundamentals. The Dow crossed three new century marks – 14,000, 15,000, and 16,000. It also closed at new record highs on 52 trading days, including on December 31st. Does that mean the bull market is over? Not necessarily.
As we go into 2014, I note that the S&P 500 margin debt (money borrowed to buy stocks on margin) is at all-time highs. It’s not uncommon to see margin debt increase during a bull market. However, looking at what happened after past peaks formed in 2007, 2000, and 1987, there’s a lot of risk when margin debt begins unwinding as speculators head for the sidelines.
Additionally, we have rising interest rate pressures, a shaky economy, and what appears to be the beginning of the Fed’s attempt to reverse the last five years of stimulus.
With all of this said, there is still a very real chance that the markets can go higher. The markets can continue to grind higher so long as investors trust that the global central banks are going to be able to support the markets, and at some point unwind their economic stimulus without large dislocations. The Fed wouldn’t have begun tapering if officials weren’t convinced the economic foothold was improving. With the recent technical strength in the stock market and improving economic reports heading into 2014, there’s a definite possibility of additional gains this year.
So, what’s an investor to do? My advice is to proceed with caution.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.