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A 2014 Stock Market Mid-Year Review

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What Do We Know?

[A SPECIAL R&D REPORT FOR THE ME-P]

By Lon Jefferies MBA CFP®

Lon JefferiesIf you pay close enough attention to the news media you’ll eventually learn that much emphasis is placed on pundits’ forecasts, but very little consideration is given to how accurate the projections turn out.

When 2014 started, there were some pretty widely-accepted expectations regarding the investment environment. Let’s take a minute to review those anticipations and analyze how precise they turned out to be.

Interest Rates

One of the most universally accepted beliefs going into 2014 was that interest rates were on the cusp of rising, and that consequently, bond returns would drop. (Of course, this has been the expectation for around five years now, but that is a discussion for a later time.) Investors were questioning whether they should reduce or eliminate the bond portion of their portfolios until the rate increase occurred.

So, have we experienced the rise in interest rates we were expecting? On 1/2/14, the yield on the 10-year Treasury note was 3%. As of 6/30/14, the yield on the same note was 2.516%.

That’s right — interest rates have actually decreased over the last six months. Did those who stuck with their investment strategies and maintained their bond positions experience a decline in their portfolio’s value?

Here is how a variation of different bonds have performed year-to-date (as of 6/30/14):

  • US Government Bonds (IEF): 4.89%
  • US TIPS (TIP): 5.25%
  • Corporate Bonds (LQD): 5.37%
  • International Bonds (IGOV): 5.66%
  • Emerging Market Bonds (LEMB): 6.42%

Equities

How about the equities side of the portfolio?

In January, predictions for stocks were all over the map — some predicted a full out correction (a loss of more than -20%), some predicted that we would keep chugging along at 2013′s pace, and most predicted something somewhere in between. There were, however, many factors that were a common cause of concern.

So, was the reduction of the Fed’s Quantitative Easing a legitimate fear? In fact, this possibility has come to fruition. In December, the Fed was buying $85 billion per month of financial assets from commercial banks and other private institutions. The Fed has reduced this monthly amount during every meeting it has held this year, and that amount is now down to $35 billion per month. However, the key question is what impact has this had on the stock market.

Here is how a wide basket of equities have performed year-to-date (as of 6/30/14):

The most widely accept fear among equity investors was the phasing out of the Fed’s Quantitative Easing (QE) program. Investors worried that the Fed would begin lowering the amount of loans the government would buy from commercial banks each month, which would lower the availability of capital in the economy.

Historically, less money in the system leads to less investing in new businesses, less innovation, and fewer jobs created.

  • Large Cap Stocks (IVV): 7.08%
  • Mid Cap Stocks (IJH): 7.57%
  • Small Cap Stocks (IJR): 3.30%
  • Foreign Stocks (IEFA): 4.34%
  • Emerging Markets (IEMG): 4.70%
  • Real Estate (IYR): 16.09%
  • Commodities (DJP): 7.32%
  • Gold (GLD): 10.27%

Volatility

The last widely-held viewpoint at the beginning of the year was that 2014 was likely to be a year more volatile than anything we had experience in 2012 or 2013. There was a lot of clatter about valuations and PE ratios being too high, concern about the war in Ukraine, a consensus that China was about to experience a drastic decline in both imports and exports, and a general feeling that the market was due for a significant (if not healthy) pullback.

Additionally, how much have we heard about unfavorable weather patterns over the last six months?

Managing a Stock Portfolio

Lessons Learned

Of course, all of this is not to say that interest rates will never rise, that bond values will never decline, and that the market won’t return to the roller coaster it is.

In fact, all those things are certain to happen. Unfortunately, anyone who contends to know the uncertain part of this equation — when — likely doesn’t actually know anymore than you or me. For this reason, having and sticking to a diversified investment strategy that coincides with a detailed financial plan is the most likely path to financial success.

The most significant lesson inherent in these numbers is that market expectations are essentially useless. Near the beginning of the year, the vast majority of experts anticipated interest rates to rise, bond values to drop, and volatility to increase. Unfortunately, pundits making projections are rarely held to their inaccurate forecasts and are allowed to continue making a living showing they have no greater knowledge than the average investor.

Assessment

So, has 2014 been a wild ride?

The S&P 500 dropped by -5.51% from 1/22/14 – 2/03/14, and by -3.89% from 4/2/14 – 4/11/14. These are the only declines of more than 2% that the S&P 500 has experienced all year!

Additionally, as of 6/30/14, the S&P 500 has now gone 54 consecutive trading days without an up or down move of greater than 1%, the longest stretch since 1995! By historical standards, 2014 is considered to be a very smooth ride.

More:

Stock Market at New Highs!

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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12 Responses

  1. Here’s the investing roadmap for the rest of 2014

    Lon – Nice review. Now, even though we have a clearer sense of the economy’s trajectory, these are not normal times.

    http://money.msn.com/top-stocks/post–heres-the-investing-roadmap-for-the-rest-of-2014

    Bernard

    Like

  2. Here’s an investing roadmap for the rest of 2014?

    http://money.msn.com/top-stocks/post–heres-the-investing-roadmap-for-the-rest-of-2014

    Even though we have a clearer sense of the economy’s trajectory now, these are not normal times.

    Asher

    Like

  3. Updated: 07/16/2014 05:01 ET

    DOW 17,138.20 +77.52
    NASDAQ 4,425.97 +9.58
    S&P 1,981.57 +8.29

    New market highs, anyone?

    Clay

    Like

  4. How to survive a 10% market correction

    Stocks are overdue for a pullback?

    http://money.msn.com/investment-advice/how-to-survive-a-10percent-market-correction

    Here’s how to get ready.

    Artie

    Like

  5. New S&P High

    DOW 17,113.54 +61.81
    NASDAQ 4,456.02 +31.31
    S&P 1,983.53 +9.90

    Clay

    Like

  6. Another New S&P High

    DOW 17,086.63 -26.91
    NASDAQ 4,473.70 +17.68
    S&P 1,987.01 +3.48

    Asher

    Like

  7. Don’t Cry for Me – Argentina?

    A breakdown in talks between Argentina and U.S. creditors just sent the country tumbling into its second default in 13 years and shifted focus to what effect that default could have on global financial markets.

    http://www.bloomberg.com/news/2014-07-30/argentina-defaults-according-to-s-p-as-debt-meetings-continue.html

    http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140731&id=17821844

    Any thoughts?

    Esmerelda

    Like

  8. World Wide Angst?

    This market tizzy is all about Russia. So, what does the country have to do with the price-to-earnings ratio of the S&P industrials?

    http://money.msn.com/top-stocks/post–this-market-tizzy-is-all-about-russia

    From here on in, everything.

    DOW 16,572.00 -308.36
    NASDAQ 4,371.88 -91.02
    S&P 1,931.65 -38.42

    Esmerelda

    Like

  9. Three reasons not to bail on stocks

    ‘Now is not the time for investors to head to the exit’; or is it?

    http://money.msn.com/top-stocks/post–3-reasons-not-to-bail-on-stocks

    Claude

    Like

  10. Lower Guidance May Be Theme For Earnings Season

    Given continued/accelerating European economic weakness and widespread weakness among the most recently reported US data (manufacturing, services, consumer confidence, construction and executive confidence), the key takeaway from the upcoming earnings season may be companies’ forward guidance.

    Last quarter’s earnings seem likely to be quite strong, but the prospect of Ex-US economic weakness spreading throughout the world (or at least the perceived possibility/probability of such in the eyes of corporate executives) could cause the third quarter earnings season to be more about the windshield (the future) than the rear-view mirror (the past).

    http://unlovedmoney.com/2014/10/11/junk-bonds-credit-risk-back-in-play/

    David Twyford

    [via Ann Miller RN MHA]

    NOTE: David Twyford is a private investor. He is a former commodity exchange member/broker who has been quoted by Forbes and written for Futures magazine.

    Like

  11. Goldman: The Stock Market In 2015 Will Be … eh?

    Goldman Sachs equity strategist David Kostin is out with his 2015 outlook for the S&P 500.

    Kostin’s price target: 2,100.

    This equates to a roughly 5% return for the benchmark stock index, as the firm said it expects above-trend economic growth which suggests “below-average return dispersion and volatility and a year of disappointing returns for active fund managers.”

    http://www.msn.com/en-us/money/markets/goldman-the-stock-market-in-2015-will-be-meh/ar-BBeQZaz?ocid=iehp

    Kyle

    Like

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