Cautious Optimism Going Into 2014

As 2013 comes to a close, the S&P 500 is trading near its all-time highs amidst a five-year rally.  The economic backdrop heading into the New Year is constructive enough for cautious optimism.  Economic trends continue to suggest modest improvements in the labor market, subdued inflation, and improving business as well as consumer sentiment.

We noted last week that, at long last, the Federal Reserve will begin tapering its Quantitative Easing program next year.  The pace at which the Fed withdrawals this stimulus will be data dependent as the most recent FOMC statement emphasized, “…asset purchases are not on a pre-set course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

Additionally, last Thursday the President signed a compromise budget that reduces the risk of another government shutdown for at least the next two years.  This is something that Congress has not been able to accomplish since 2009.  Early next year, Congress will debate the debt ceiling once again.  If they are able to compromise it will be one less headwind for the economy and the stock market.

We have observed, counter-intuitively, that good economic news has been bad news for stocks, as the market worried about the Fed removing its accommodative monetary policy.  Since tapering was announced earlier this month along with assurances that the Federal Funds rate will stay lower for longer, this dynamic has moderated and good news has been good news for the market once again.  We will continue to monitor this dynamic closely going into 2014.

2013 was an extraordinary year in terms of stock market performance, and it underscores the importance of a consistent and disciplined approach to investing.  There were many opportunities to “time the market” throughout the year and one could argue even now is such a time.  Our experience has taught us that “timing” is an exercise in speculation not investing.  We continue to seek out new opportunities in the market as well as actively monitor our current portfolio.