10-15 Associates: Investor Newsletter Issue Nº 16
January 2014
Be Careful What You
Wish For
By Deborah DeMatteo, Vice President & Chief Investment Officer
We begin the year looking back
on a year that will go down in the record
books in many ways. It was not just the
astonishing results the market posted,
but the overwhelming lack of
expectations that the year started off
with. It was a year also filled with
unprecedented monetary policy support
and the reality of the beginning to the
end of the Bernanke support. We usher
in the New Year with trepid expectations
of what 2014 can possibly offer as an
encore to 2013. Let’s peer into the
future and explore some of the things
that could shape the markets for the next
several months.
Although the markets posted
one of the best performances in decades
the risks to the recovery unfortunately
still persist! From a global economy
perspective,
Europe’s
revival
is
challenged on many fronts. Like the
United States, their recovery is highly
dependent on the availability of credit.
Based on a survey conducted by the
European Central Bank, a willingness to
lend remains stubbornly near postfinancial-crisis lows. If the banks fail to
get back to business and make the
money available to those willing to spend
and invest, it will be nearly impossible
for the economy to continue improving.
Japan has been a center of
hope that the zero interest rate policies
adopted for crisis management will
eventually work. During 2013, Japan
experienced a surge in economic growth;
that unfortunately, is already showing
signs of fatigue. The implementation of
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a sales tax increase for this year could
dampen consumer spending sending the
economy back into a downturn.
Japanese Central Bankers need a
recovery to offset the massive stimulus
poured into the Japanese economy. In
comparison, the support Japan has
provided to its economy makes what our
Federal Reserve has done seem like
child’s play. An unraveling of the
Japanese financial system is one of the
risks many will be watching very closely.
uptick of inflation in the economy?
While their favorite gauge of inflation,
the PCE deflator, has remained
stubbornly low, the GDP price index
rose at an annual rate of 2% during the
third quarter. This would indicate that
inflation might be running higher than
policy makers expect. If that’s the case
the current plan to slowly take away
stimulus would have to be revised
causing disarray in the bond markets.
Chad Crowe
- WSJ
Here in the United States, 2014 will be
the first year since the great recession
that we will experience the reduction of
monetary stimulus rather than the
introduction of new support.
We
absorbed an unprecedented percentage
rise in interest rates in 2013, but is the
economy ready for the continued
increase that could come as the Fed
implements the tapering of bond
purchases this year? Higher rates are a
good thing; if it is a gradual move based
on the reflection of a stronger economy.
But what if the Fed has misread the
The strength of the economy
this year may be a story of “be careful
what you wish for.” If the economy
heats up too much, we will have to adjust
to the fact that the Fed is way behind the
curve and rates will have to move up
much faster than current assumptions.
In 1994 the S&P 500 dropped 7.4% in
two months after the central banks
surprise interest rate increase.
In
October 1987, the Dow plunged 23% as
investors realized the Fed had misjudged
the strength of the US economy.
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10-15 Associates: Investor Newsletter Issue Nº 16
What about the positives? Since
1927, the S&P 500 has finished in positive
territory in nearly two thirds of years that
followed a gain of 25% or more. A long
awaited correction is not necessarily a bad
thing. Stocks often move in either direction
too far, and have to adjust to more realistic
levels as the economy provides the
necessary data to sustain the trend in either
direction.
The momentum of the
economic data going into 2014 would
suggest the economy remains firmly in
recovery and many signs point to the ability
for it to continue.
Housing posted a significant
rebound; but affordability, tracked by the
National Association of Realtors is still quite
favorable allowing for the potential for
rising home prices in 2014. The rebound
could lead to a greater contribution to GDP
growth in the coming year in all the three
ways that housing usually boosts growth:
spurring construction activity, encouraging
consumption through a positive wealth
effect from rising home prices, and through
stimulating purchases of durable and
nondurable
goods
that
accompany
purchases of homes.
According to
Moody’s Analytics chief economist “The
US is clearly in a home-price up cycle that
has a lot of room to run.”
The Automotive Industry, a
source of jobs for thousands, continues to
see a strong recovery. In 2013 auto sales in
the US had the best year since 2007.
Consumers last year purchased 15.6 million
vehicles and purchases of light trucks
exceeded cars, a significant reversal from
the last several years. The trend toward
higher priced and more luxury models will
improve profit margins for the recovering
auto makers.
A trend to watch from 2013 that could have
a significant impact on the stock market was
felt most by Pimco’s Bill Gross. Rising
interest rates during the past year has led
many investors to reevaluate how much of
their assets they want to leave in the bond
market. For a year that was so generous to
stocks, according to Morningstar, the
Barclays US Aggregate Bond Index was
down 2.02% for the year. From 2009-2012
as investors sought safety in bonds Mr.
Gross’s fund took in $85.8 billion in new
cash. Investors aren’t waiting to see what
happens this year more than $41.1 billion, a
mutual fund industry record, was pulled out
of the fund in 2013. Will 2014 really be
the beginning of the great rotation out of
bonds and into stocks? Only time will tell
but this is a trend worth watching.
We remain constructive on the
economy and the markets. There are many
things that remain as headwinds making this
part of the recovery challenging. The
groundwork has been laid to provide
support if we hit some stumbling blocks
along the way. The turning of the calendar
does not gesture to me that we need to
rethink the strategy that worked well last
year. The trends that led us to our current
allocations remain firmly in place and we
will pay attention to anything that would
indicate that changes should be made.
There are many compelling reasons to look
forward to 2014 as the year that the
economy really begins to recover and has
the ability to function without the Federal
Reserve in the driver’s seat!
We wish you all a very happy New
Year and great health and much happiness!
20 % return. The dramatic rise gives
credit to the question of whether we are
in a bubble again or not. But what if we
back up just two years earlier to a time
January 2014
\
Deborah DeMatteo has more than
30 years of experience and is the cofounder and chief investment officer
of 10-15 Associates.
She cofounded the registered investment
advisory firm 25 years ago.
At 10-15 Associates, we specialize in
managing and protecting retirement
savings and portfolios. Over the 25
years, our clients have referred their
family and friends and our firm has
grown. Today our staff serves more
than 1,200 clients and manages over
half a billion in client’s assets.
Headquartered in the Hudson
Valley village of Goshen, New York,
we help our clients make successful
transitions
from
saving
for
retirement to living in retirement.
For More Information:
Please call (800) 225-1015
Or visit us at:
www.1015associates.com
10-15 Associates
168 Main Street
Goshen, NY 10924
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