The big, bad Fed announcement is out of the way. Lawmakers in D.C. decided not to act like children this Holiday Season. The U.S. economy grew at a 4.1 percent clip in the third quarter. Corporate profits are at all-time highs. Inflation is low. Rates are low. The S&P 500 is up +27.5 percent on the year. And Santa Claus is coming to town. Nice.
To be sure though, the current bull market is getting long in the tooth. As such, we've talked a lot lately about the idea of entering 2014 with your eyes wide open and your risk-management tool belt strapped on. In other words, don't expect the 2013 playbook (all U.S. stock market, all the time) to work its magic again next year. No, instead of sitting back and enjoying the ride, you may need to actually work for your returns in 2014.
But with that said, it's that time of year to wax nostalgic about the year that was. So without further ado, here is the first installment of "The 13 Things We Learned in 2013."
1. Yes Virginia, The U.S. Stock Market CAN Be The Best Place To Be
In the old days, beating the U.S. stock market (aka the S&P 500) was relatively easy. If the U.S. was in a bullish mode, all one had to do was diversify your holdings a bit. Investing in any of the emerging markets usually did the trick. (Remember the BRICs?) Looking at the Far East also tended to boost your beta. Adding some commodities usually gave your returns a lift. And even playing in the junk bond space was a pretty good way to improve returns and smooth out the ride.
However, in 2013, that game didn't work - at all. Nope. Emerging markets got smoked as the EEM is down -8.7 percent as of Friday's close. China's proxy (FXI) is off -7.7 percent. India (EPI) is down -14.5 percent. Russia (RSX) was no picnic either with a return of -4.2 percent. Heck, even the usually reliable junk bond play (JNK, HYG) didn't pan out this year.
So, the first, and perhaps most important, lesson to be learned from 2013 is that you can't "set it and forget it" in this game. No, you've got to keep your eyes open and be willing to go where the performance is - even if that means your global investing strategy winds up being 90% invested in the good 'ol USofA. (Ours certainly did!)
2. "No New Crisis Meant No Meaningful Correction"
As the late Marty Zweig famously said in the mid 1980's, "Anyone using a crystal ball will wind up with an awful lot of crushed glass in their portfolio." As such, trying to predict what the U.S. stock market is going to do next is a fool's errand.
However, every once in a while, even a blind squirrel finds an acorn. And the prediction that was made in this space early in the year turned out to be dead on.
After the much ballyhooed "fiscal cliff" didn't happen, we opined that the market had finally come to grips with Europe's debt mess and Washington's dysfunction. Thus, the idea was that unless there was some new crisis for the algos to get up in arms about, the U.S. stock market wasn't likely to experience a "meaningful" correction (i.e. a decline of 10 percent or more).
Sure enough, this was a good call as the S&P's biggest pullback occurred in May-June and only produced a decline of -5.75 percent. After that, the pullbacks were basically short and sweet as the "buy the freaking dip" strategy was implemented time and time again.
3. Something Everyone Knows Isn't Worth Knowing
At the beginning of 2013, "everybody" in the game could rattle off the reasons that stocks were likely headed back into the abyss, and soon. There was the "fiscal cliff" and the accompanying "sequester cuts." There was Europe - yes, again/still. There was the slowdown in China. There was the weakness in the U.S. economy. There was the unemployment issue. And there was the idea that the Fed was out of bullets. All was lost!
However, as we have mentioned a time or two this year, none of the projected debacles actually came to pass. The fiscal cliff wound up being a speed bump. People stopped worrying about the EU. China's growth rate did slow - to 7.5 percent (the horror!). With no new crisis, the U.S. economy improved. Unemployment declined. And the Fed continued to pump cash into the financial system, setting up the "wealth effect."
The lesson here is that something "everybody" in the game knows, isn't really worth knowing. Why not? In short, by the time everybody knows that a scenario exists, it is likely already priced in.
Remember, the stock market is a discounting mechanism and it looks forward, not back.
4. Getco, Citadel, Goldman et al Can Move The Market At Any Time
One of the biggest lessons to take away from 2013's stock market action is that the big HFT players such as Getco, Goldman, Citadel, etc., can move the market by 0.5 percent at just about any point in time and for just about any reason - or - for no reason at all.
If you want to see this in action, just keep a 1-minute chart of the S&P 500 up on one of your screens. If you watch the action on that 1-min chart over a week or two, it will become obvious that stocks will spike up and/or down during the day - oftentimes for no reason at all.
The takeaway here is to understand that even a market as large as the S&P 500 can be "moved" by the "big boys" at the speed of light. Therefore, there are many times when a move of 0.25 - 0.5 percent is just "noise" as the computers play their games during the day.
In addition, it is important to recognize that the HFT game increases the size of the big moves - in both directions. As such, learning to differentiate between what is just algo/reindeer games and the "real" moves can be critical.
If you are interested in learning more about this subject, be sure to check out The Wall Street Code - it's 50 minutes of must-watch video for anyone looking to understand how the stock market REALLY works.
Publishing Note: The Holiday Season means it is time to focus on the family. As such, I'll be taking a break from the keyboard for the majority of the next week or so.
Turning to This Morning ...
It appears that Santa Claus is making an appearance at the corner of Broad and Wall this morning. Comments made on Sunday by IMF head Christine Lagarde about U.S. economic growth continuing to improve has sent stock futures up by double digits. However, Richmond Fed President Jeffrey Lacker is attempting to play Grinch on CNBC, saying that the Fed may need to raise rates in early 2015. But at this stage, stock futures point to a stronger open.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Japan: Closed
- Hong Kong: +0.48%
- Shanghai: +0.25%
- London: +0.52%
- Germany: +0.64%
- France: -0.07%
- Italy: +0.25%
- Spain: -0.07%
Crude Oil Futures: -$0.36 to $98.96
Gold: -$4.00 to $1199.70
Dollar: higher against the yen, lower vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.900%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +10.98
- Dow Jones Industrial Average: +81
- NASDAQ Composite: +33.41
Thought For The Day ... Respect yourself & others will respect you. -Confucius
Positions in stocks mentioned: none