Don't expect another record stock market year
During 2013, the stock market experienced a record year.
The S&P 500 was up 32.39 percent. The NASDAQ was up a mind-blowing 40.12 percent.
It would be unreasonable to expect anything near these returns in 2014.
This will not stop some people from believing that this can occur again. Most analysts expect single-digit returns or maybe the long overdue correction. Markets usually have corrections every few years. This market has been mostly up since the crash in 2008. Investors should decide if they should take some of their profits off of the table and lock in the gains. Paper profits are not realized until they are cashed out.
This would be more important for older investors since they do not have as much time to make up for a major correction as younger investors. People with lots of assets can be more aggressive than investors with more limited assets.
While we are very early in the new year, the market has not started out very well so far. It is much too early to spot a trend yet, as we have discussed in the past, the Fed's upcoming actions have greatly benefited the stock market. The Fed has already said that it will begin tapering. This means that the Fed will start reducing the $85 billion of bonds that it has been purchasing each month. It is expected that it will buy $10 billion less each month until its purchases are zero. The speed of these reductions will depend on the economy.
Tapering will have an effect on interest rates. They will go up. This will mean that some money in the stock market will rotate back to higher paying bonds as there will be an investment choice. Higher interest rates will also reduce companies' profits because of increased costs and make share repurchases more expensive. All of these factors have helped raise stock prices.
Tapering is just the first step for the Fed. At some point down the road, it will start tightening. During this phase, interest rates will go up even faster. This is when the Fed increases reserve requirements at the banks and raise the discount rate that banks use to borrow money from the Fed. It will also have to start selling bonds that it has been buying every month to clean up their bloated balance sheet. Since interest rates are set by actions, this over-supply of bonds for sale will allow investors to demand higher interest rates. There will also be questions about the change in leadership at the Fed. Ben Bernanke is out and Janet Yellen is in as Fed chairman.
Not all investments did well in 2013. Commodities and gold in particular were down in value. Gold was down 7.79 percent. Remember several years ago, gold was the fastest growing asset class. This is one more reason to consider rebalancing your portfolio.
Bond values, as measured by the Barclay's Aggregated Bond Index, posted the first negative return since 1998. It was down 2.02 percent. We have been warning that bond values will continue to go down as interest rates rise. This is always true since all investors want the high yield if the risk is the same.
Although Congress finally compromised on a budget for the first time in years, there could still be a battle over the debt ceiling.
The effects of the Affordable Care Act will also be taking a toll on the economy. The government website is working better than at the beginning, but only a small number of the expected people have signed up for a policy. Young, healthy people are not signing up for policies and the program cannot work without their premium dollars. If only older and sicker people apply, there will not be money to fund the expenses and we will see even bigger premium increases next year.
Not surprisingly, people who get a government subsidy are happy, but other groups are finding prices that are rising. People who get their health care coverage at work do not qualify for a subsidy for their family members. Seniors and people without subsidy are paying much more. There are reports that some people who believe that they have coverage may not because of all the website issues.
With all of the news coverage about the 40 million people who had their credit information stolen from the breach at Target, we must all deal with this identity theft. To help, we are offering a free report of some things you can do to protect your family. To get your free copy, e-mail your name and address to firstname.lastname@example.org.
Gary Boatman is a certified financial planner and a local businessman who serves as president of the Monessen Chamber of Commerce.