2013 is ready for the history books as an exceptional year on the financial markets in many regards. For the first time in five years there were no signs of a big financial crisis anywhere in the world. At a certain point it felt like Japan was going to be next in line to be hit by an implosion, but the swift actions from the Bank of Japan squashed the possibility. A party ensued on the Japanese stock market, which took away the prize for ‘best market in 2013’ with a rounded return of 50%!
The stock markets fared well this year. But the global economy stabilized all over too, with a modest growth of 1 to 2 percent for Western economies and 4 to 7 percent for the emerging markets. Of course, we have the extremely accommodative monetary policy from the central bankers to thank for this. They were again quite busy in 2013. The Federal Reserve for example, coupled its stimulus package to economic targets for the first time. More specifically an unemployment rate of less than 6.5 percent and an inflation rate of more than 2 percent. In the aftermath of these decisions, the Fed adjusted their monthly debt buyback program upward, to 85 billion dollars.
It is not about fighting of crises anymore, but about supporting balance sheets of banks, financing government spending and keeping the bond markets in check. Meanwhile, the core of the problem from a few years back – a huge pile of debt – is far from solved. You do not have to be a rocket scientist to understand that sooner or later this will have its effect, which is when the financial markets will be challenged once more. The only sustainable solution for the debt problem is economic growth, but at this stage it is practically impossible for Western societies like the US or Europe to grow its way out of debt. The gap between income and spending has become too large and it is increasing exponentially.
One day we will have another Big Bang. The question of ‘when’ is extremely hard to answer, however. Because until that time, the current trends will remain intact. That is why we are keeping an ‘open mind’ over at Sprout Money [21]. Do not get caught up with one asset class or another. Make sure you have a decent mix of different assets in your portfolio. Be alert, but nimble. Ensure you respect your cash position as you never know what tomorrow might bring. New opportunities might present themselves fairly quickly. And although we do not have a crystal ball, we do want to share a few scenarios with you based on our decades of experience in the markets. As always, we are focusing on our specialties: stocks and commodities.
Stocks
This past year presented new highs for stocks. The Western markets are trading 20 to 30 percent higher, and the most important indices put historical records on the board. That is an important sign if we look at the big picture. Stocks practically broke free from the crisis period as you can see on the Bank of America chart below, which depicts the S&P 500 since 1927.
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Not only did we just experience a similar crisis period as we did in the ‘30s and ‘70s of the last century, but the recent breakthrough also fits the mould well. However, we do expect that this breakthrough will be tested. Technical analysis would say that the last resistance level should become the new support level. For the S&P 500 that line lies somewhere around 1,550 to 1,600 points. That is why we do see the markets continuing the race in the first months of 2014, but the rally will meet resistance at some point, probably around symbolic barriers. If we have to make an estimation: the S&P 500 can go to 2,000 points, the Dow Jones could jump to 18,000 and the Nasdaq will have to meet its historical resistance at 5,000 points. Indeed, the technology sector is not in record territory yet!
Investing however, is looking ahead. Stock markets are trading 6 months ahead of the real economy. Those who want to predict the evolution of the markets in 2014, has to predict in one way or another the developments in 2015. As the expectations of corporate profits keeping growing at a decent pace, we foresee some ‘fear of heights’ among investors by that time. That will translate into a more turbulent year for the markets next year, possibly even before the summer. Although we are far from negative, we do predict that the stock market will not repeat its amazing 2013 performance. We expect a modest but higher close at the end of 2014 (around 7 percent) for the traditional markets. Investors will have to search for profit growth (technology stocks) and laggards – the emerging markets – to realize an above average return next year.
Commodities
2013 was as exciting for the stock market, but it was quiet for most commodity markets. Important (economically relevant) commodities barely made the news. While oil is closing off the year modestly higher, the copper price is now a little bit lower. Also in the agricultural sector there were mixed results between the grains and the softs. For real fireworks however, precious metals where the place to be, but in a negative way. We had predicted last year that the stock market could become a party pooper for gold and silver. And that scenario is exactly what happened.
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As you can see on the above chart, the gold market blew off a lot of steam in 2013. The market sentiment however, felt like gold is done for. Nothing is further from the truth! Although the gold price almost had a 30 percent correction this year, it is still 3X higher than ten years ago. The secular bull market is more than intact. We are not giving up on the precious metal just like that.
We have seen movements like this before in the ‘70s. Things actually were a lot worse then, as the market had a correction of almost 50 percent, with all the doom and gloom at the time. Afterwards, the gold price made a full 180 and shot up at a ratio of 8X in the four years after. We are not saying that the next four years are going to be the same, but the gold rally is far from over. For 2014, we do expect a stabilization and a first ‘recovery’ for gold. If you look at the fundamentals, you cannot ignore the enormous demand for the precious metal. China bought most of the gold production of 2013, while the supply could possibly decrease because of the lower gold price. If we have to make an estimation for next year, we do see gold coming close to its historical record price. For gold’s ‘little brother’, silver, we expect a similar recovery, although a new record price might be a bridge too far.
We also foresee upward pressure for other commodities. The structurally higher prices of years past will continue their trend. Not only as a consequence of the increasing global demand, but also because of monetary measures taken by central bankers. The inflationary pressure will sooner or later have its effect within the commodity complex.
In summary we are keeping an open mind for 2014, with the current trend leading the charge. Increased turbulence, however, will most likely cause changes along the way. That is why flexibility, in the form of a decent cash position, is a must for every investor in the new year. New opportunities and challenges may present themselves at any given time. Our sights are mostly set on technology stocks, Chinese stocks, and gold and silver mining stocks.
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Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report [23] and the Technology Report [24].
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