Stock market trading was somewhat thin this week as people across the country dealt with the return of the polar vortex. The ominous-sounding weather event blanketed the mid Atlantic and parts of New England with snow accumulations of 6 to 12 inches or more, accompanied by strong winds and extreme cold. While the thermometer drops again in some U.S. regions, however, economies globally are heating up.
The International Monetary Fund (IMF) increased its global growth forecast Tuesday, for the first time in nearly two years. The Washington-based organization is expecting the world’s economy to increase by 3.7 percent this year, 0.1 percent more than its previous estimate. The organization expects even faster growth in 2015, of 3.9 percent. Behind those numbers, the IMF sees economic activity in mature economies, led by the U.S., picking up slack from softer emerging economies.
The IMF’s prediction followed Monday’s report that China’s economy grew by 7.7 percent in 2013. Although that’s near a 14-year low, China remains in good shape. And its expansion last year was hampered by slowing exports. That headwind will be reduced in 2014 thanks to improving Western economies.
It’s worth nothing that 2014 is a midterm election year. But it’s important to remember that the stock market has a long history of producing sub-par returns during midterm election years.
Since 1900, stocks have only gained an average of 4 percent (excluding dividends) during such years. That’s about half their normal annual pace.
That’s not to say prices have never advanced strongly during midterm election years—double-digit returns are not unheard of in the second year of a Presidential cycle. But often the market has also experienced corrections in the second year of the cycle, leading to years that go down overall. In fact, since the start of the 20th century, the market has only advanced 57 percent of the time during these years. In contrast, it has gained more than two-thirds of the time for any given year and 82 percent of the time in the third year of the cycle.
It seems hard to believe but the bull market is just shy of entering its sixth year. On the heels of a strong 2013, analysts have tempered views of where stocks are headed in 2014, but on balance Wall Street strategists remain upbeat and project an 8 percent annual gain (before dividends) for the S&P 500 this year. In light of the market’s steep valuations, however, such gains are likely to be a stretch and unlikely to occur without a sizeable correction first.
A saving grace for the market and the economy is the fact that there’s still plenty of slack in the economy and that prices remain contained. Indeed, consumer prices remain below the lower end of the Federal Reserve’s target band. And with crude oil, which is by far the most important of commodities, essentially flat on a year-over-year basis, inflation will pose no threat in the near future. The absence of inflation also takes pressure off the Fed to rush to remove its current quantitative easing program. Let’s hope the central bankers don’t move too quickly to remove this stimulus, which could impede the pace of expansion.
For now anyway, the correction we anticipate could prove merely a pause that refreshes rather than the start of an ugly bear market.
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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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