January 2014 Client Letter

Happy New Year.

            Well, when all was said and done, 2013 was a rather exceptional year for investing.  Across the board markets rallied.  The Standard and Poor’s 500 finished its best year since 1997 and the Dow Jones Industrial Average finished its best year since 1995.  Both indexes closed at record highs for 2013.

            So will this very good fortune continue into 2014?  History tells us “no.”  Since 1927, there have been 23 years that the markets increased by 20% or more.  But only once did the following year beat its predecessor.  On the other hand, in those years where the S&P 500 finished the year 25% higher, 66% of the following year also ended in positive territory. 

More likely, 2014 will continue forward movement, but at a much more measured pace.  Analyst estimates point to gains ranging from 4% to 10% for 2014.  Still that is not bad considering that the average annual 142 year return for the market is 8.8%.

            Positives for 2014 include increasing optimism about the U.S. and global economies.  In the U.S., interest rates will remain low, inflation is in check, employment is up, the housing market continues to improve, and consumer and corporate spending is increasing.  All of these bode well for continued domestic economic acceleration.  In addition, with $10 trillion still sitting in retail investor cash accounts, as that money moves into the markets, that also could drive stocks higher.

            Overseas, Europe is officially out of recession and China’s annual growth is expected to remain above 7%.  Both are indicative of increasing global recovery.

            But lest we get overly optimistic and confident about 2014, I expect the run-up we enjoyed in 2013 will regress some in 2014.  In 2013, we only had five pullbacks of 2% or more.  Additionally, it has been 27 months since the S&P 500 corrected down 10% during this bull market.  The average periodicity for such correction is 18 months.  Profit taking and the “reversion to the mean” where it comes to stock prices and valuations could result in a pullback between 5%-10%.  If and when that happens, it offers an ideal time to make further contributions to your accounts.

            And be prepared for some more volatility in 2014.  This is normal and would likely be related to financial or political issues in Washington, Europe, China, and the Middle East.

The views expressed here are that of myself 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.