After delivering robust returns in 2013, stocks are off to a much rockier start in 2014. Friday’s decline capped the biggest monthly selloff in stocks in more than a year. The Dow dropped 149.76 points (0.9%) and closed at its lowest level since November 7th. The S&P 500 declined 11.6 points, marking that Index’s third consecutive weekly slide. The two benchmarks ended January down by 5.3% and 3.6%, respectively.
The decline is likely being driven by concerns about emerging market weakness along with worries about the potential impact of the Federal Reserve’s efforts to reduce its monetary stimulus. In addition, while earnings reports so far have been modestly ahead of analyst consensus estimates, the amount of this excess is slightly below the prior quarter’s outperformance; expectations for 2014 have also been pared modestly.
For investors, the rocky start to the year marks quite a departure from recent experience. There has been very little market volatility over the past year, and it has now been nearly two years since there has been a correction (generally viewed as a price decline of 10% or more) in any of the major US stock market indices. While the absence of a market correction for a long time tells us little about the market’s overall state, the odds of a correction move higher as time goes on.
We also note that the market bears are typically more passionate than the bulls, so investors shouldn’t be surprised to see an increasing number of media stories discussing the potential that a correction has started, or that perhaps we are in the early stages of a bear market. However, it is important to note that, historically, bear markets have typically coincided with economic recessions, and to date most forecasts are for an increase in the rate of economic growth.
At BWFA, we remain steadfast in our belief that over the long term the market is likely to move higher. At the same time, we expect the market to experience a few more bumps in 2014 than it in recent years, and we are prepared to exploit whatever opportunities come our way.