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Mad Dash

Continuing its pursuit of a top-10 year, the stock market raced ahead in November to new high after new high.  As measured by the S&P 500, the stock market rose 2.8% for the month and is now up 29.12% for the year.   On a price return basis (not including dividends), the market is up 26.6% year to date.  If we look back to 1929, the S&P 500 has ended the year with a price gain of 26% or higher 15% of the time.  Expanding that thought, it has ended the year with a gain of 20% or higher nearly 30% of the time.  Investors tend to become uncomfortable with double-digit returns.  The media quickly begins to talk of the next bubble.  The fact is, 20% plus returns are fairly common in the stock market.

So, 2013 has been a super year for US stocks.  The question is, what should we expect next year?  Historically, the year following a 20% plus return year is overwhelmingly positive, by a factor of 2 to 1.  There have been 22 years where the market has returned in excess of 20%.  The year following, 15 were positive with an average return of over 16%.  There is no reason to assume next year will be down, only because this year has been so strong.

The context is important, possibly more important than historical data.  In the last 15 years, investors have experienced two market drops of greater than 50%: September 2000-October 2002 and again from October 2007-March 2009.  The first was the TTM (Tech, Telecom and Media) bubble and the second was the Financial Crisis, which led to the Great Recession.  The roller-coaster effect is there – no one wants to feel that pit in their stomach, of a market in freefall.

In my opinion, there are several factors key to what we should expect from the market.  The first is simple and well known.  Seasonality – December is typically the best month for stocks – widely acknowledged by investors.   Since 2000, the S&P has averaged a gain of 1.7% from Thanksgiving through Christmas with positive returns 77% of the time. (Bespoke Report 11/29/2013)

The second is the mixed nature of current economic data.  It is not giving investors direction.  The Federal Reserve, shortly with Janet Yellen at its helm, is likely to begin to reduce its bond buying program early in 2014.  This does not mean the economy is back on its feet, nor does it mean interest rates are at the beginning of a secular uptrend.  There are several things that will likely change the popular and over-simplified view of the near future.  Economic growth remains sluggish, Congress will in fact have to enact some policy to support it, and deflation may be the true monster-under-the-bed.

Finally, the demographic and economic landscape is changing, quickly.  The younger generation catalyzing this economy is different.  They are not like their parents, the typical economist’s generation, at all.  For example, fewer Americans have a driver’s license and even fewer drive cars.  Since 2007, the estimated vehicle miles driven figures have fallen.  Total new car sales in 2012 are the same (15M) as they were in 1978.  Total new home sales remain 50% below the level reported 20 years ago.  And, according to the Washington Post (April 17, 2013), student debt has gone off the hook.  In 2003, 25% of people under 25 had an average student debt load of $10K.  As of 2013, 43% of people under 25 have average debt in excess of $20K. There is no reversion to the mean here.  The baseline of the economy is changing.

At the moment, we’re in the home stretch – approaching the annual finish line where investors can measure their returns and claim victory, or defeat.  The S&P is up 8 weeks in a row and it’s reasonable to take some profits, and put a little change in your pocket (or buy some presents for your family).  If your capital gains are such that selling more stock now is not an option, you can sell and rebalance in January and apply any capital gains to next year.

If you are looking to increase your stock exposure, as many of you are, extreme selectivity and patience is key here.  There has been a lot more volatility around earnings release dates this fall, and I expect that to continue.  These temporary price swings are what we look for to initiate or increase positions.  The S&P 500 and five of its ten primary sectors are too “overbought” or too expensive to approach right now.  We are available to discuss your allocation and opportunities to take profits or to put funds to work, as your circumstances dictate.  Please do not hesitate to call as we look forward to a happy and prosperous December.

Bruce Hotaling, CFA

Managing Partner

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