Business

Can the US Equities market do a repeat of 2013?

The Sterling Report

With Kevin Richards

Sunday, January 26, 2014    

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LAST year was a phenomenal year for the US equities market. The Dow Jones Industrial Average hit 52 record closes during the year to record one of the best performances of the stock market in 16 years. The Dow closed up 26 per cent while the S&P 500 ended the year up 29 per cent, the latter being a better indicator of the wider market performance. This continued a nearly five-year bull run in equities with the Dow now two and a half times its low in March 2009. Not only did the market hit all-time highs, but several stocks returned to shareholders incredible gains, including: Tesla, NetFlix, Best Buy, Twitter, Delta and Herbalife, all very recognisable names even in the Jamaican marketplace.

Even after this, one wonders if there is still room for growth and whether the market can repeat this in 2014. The data suggests that record closes in excess of 35 for the year have never resulted in a higher number of closes consecutively, even during the heady days of the mid to late 90s, when each year up to 2000 recorded in excess of 30 annual record closes. While double digit record closes were prevalent during that period, the other factor that makes them different from today was that the US recorded annual GDP growth on average of 4.3 per cent compared to the struggle now to maintain half of that average in the last two years and the prognosis of no more than 3-3.5 per cent by 2016. The employment data was also vastly different over the review period. Unemployment in the second half of the 90s average nearly 4.5 per cent compared with approximately 7.5 per cent for the last two years and at best is expected to get to 6.25 per cent by 2016. The performance of the stock market is a barometer of economic activity, but it is not a perfect gauge. This is evidenced by the bull run of the last five years despite the economic outlook being dismal for the greater part of that time.

We can never discount the impact of feel-good effect on the market. While the pundits believe that people's expectation for an improvement in the economy and their employment prospects is improving, they have not returned to the good old days of the late 90s or the mid-2000s prior to the mortgage crisis. A great deal of this is tied to an overactive Fed which through its QE measures (read: printing money) has created a wealth effect through the inflation of asset prices mainly in the housing and the stock and bond markets. The Fed's signal to curb its bond buying spree this year has brought some nervousness to the market and increased volatility. Bond jocks believe that the Fed's action is less likely to affect bonds more than stocks and the reverse is true of the stock jocks. What is true is that there continues to be this anomaly of both stock and bond prices moving in tandem with each Fed outburst in 2013, which could continue into 2014. Another trend that had been noticeable in 2013 was the steady net outflow from bond funds and a steady net inflow into equity funds. This could possibly be a sign of many being too late for the party or just the shift at the right time. The argument for either case can be seen in the data. Average market P/E's are currently in the late teens even as high as the early 20s. This is a 25 per cent jump in the average at the start of 2013 and still 50 per cent higher than average market P/E's of European stocks. The other side of the coin is that most portfolios are still underweight in equities and a lot of the uncertainties that have kept cash holdings of many fund managers and corporations on the sideline have since been resolved. Chief among them was the US budget crisis that has prolonged almost two years and aspects of the Affordable Care Act, which had implications for business. The view could be held that once corporations deploy some of this cash, corporate earnings could rise on average at a rate of 11 per cent versus 6 per cent which obtained in 2013. That should keep market P/E's in check and fuel another round of market rallies in 2014.

What is important to note is the steady progress of the market, despite the record highs of 2013 and the level of enthusiasm of the late 90s is not currently present which could lead to the bubble and bust effect. Corporate earnings going forward will be a key driver of market interest and a lot of attention will be paid on Fed moves during the year and the release of economic data.

Kevin Richards is VicePresident, Sales and Marketing at Sterling Asset Management Ltd. Sterling is a licensed securities dealer and provides investment management and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm

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