10 Steps Forward, 1 Step Back! Comments on January Stock Market

US stocks as measured by the S&P 500 delivered a phenomenal 32.4% return in 2013. That was the 6th best year for US stocks since 1940. In January, US stocks fell 3.5%. We don't watch business news anymore, but judging from an increased volume of phone calls from clients, we presume that CNBC, Fox Business, CNN and MSNBC have categorized this modest decline as "an apocalypse." Our "dashboard" shows return numbers for US and International stock markets, commodities, currencies and bond yields. A lot of red YTD 2014, but all green at the end of 2013.

On January 2nd, we spoke on Bloomberg Radio about our expectations for 2014:

  1. US stocks would experience a 10% pullback in 2014. We didn't know exactly when or why - January, April, August? Triggered by Fed action, a bad jobs report or a terrorist action?

  2. We do know that when stocks rise fast and furious, a correction of 10% is totally normal & expected.

  3. We did not plan to aggressively sell stocks, as we expect US stocks to end the year higher by December. Why incur taxes, trading costs and slippage if we don't have to?

  4. However, we had already lowered our exposure to US stocks in December as we rebalanced - taking profits on US stocks, rolling the proceeds into bonds, commodities and emerging markets, all of which had done poorly in 2013 (in other words, selling high, buying low.)

So far this year, bonds have rallied, commodities and emerging markets still struggle, and US stocks are down slightly. We continue to ADD to commodities and emerging markets, even as other rush to sell. Why? Between 1981 and 2008, the number of persons worldwide living in poverty (less that $1.25/day income) dropped from 1.9 billion to 1.2 billion, even as the world population surged from 4.5 billion to 6.7 billion. In other words, 2.9 billion ADDITIONAL consumers, primarily from Africa, Asia and South America, joined the 2.6 billion consumers of the developed West and North America. Those consumers want cars, smart phones and refrigerators, which means that no matter the short term fluctuations, the long term trend in commodities (the source of stuff) and emerging markets (the source of consumers) remains higher.

Read the entire commentary here.