Unless you were completely risk adverse, 2013 turned out to be a fantastic year for many of you stock market investors. Gains of +20 to +30% were made in stand-alone or retirement accounts. Congratulations. But as we all know, past performance is no guarantee of future success, so we must turn the page.
2014 has started out very differently from the end of last year. Much more volatility, bigger swings up and down for major stock market averages. The FEDERAL RESERVE’s recent policy move to begin tapering its bond buying has indeed begun to impact capital flows in the emerging markets. Countries from Turkey, Argentina, South Africa, along with Venezuela and the Ukraine are having difficulties. This has caused a surge in the major currencies such as the Dollar, Yen and Euro, and a rally in major bond markets.
When all is said and done, 2014 may be lucky to record anything above a +2% growth rate. This will play out at a time when the FED is mostly likely to continue its tapering policy. While the impact on the domestic economy is likely to be small, if it in anyway contributes to problems in global markets, then our exports will be impacted which would be a negative for growth.
Consequently, January ended up as the first down month for equities in almost a half-year. Without sugar coating it, this will be a tougher year for all asset classes, but stocks remain the best alternative. Bonds, emerging markets, commodities all have much higher risk profiles. The good news, is that we have the advantage of hindsight. We have seen gyrations in capital markets before. The key is to stay calm and ride out the volatility. As my mentor at Morgan Stanley once told me, “time, not timing is what wins for investors”.