Yesterday’s 317 point loss for the Dow Jones Industrial Average – coming as it did on the heels of great economic news (GDP, Jobs) – has people a bit freaked out.
As the Wall Street Journal reports, we have now erased the year-to-date gain for the Dow and are back to flat. I’m not terribly surprised given my best guess for the markets that I made the first week in January…
From the post You Are Here, published January 5th 2014:
1. The 1994 – A flattish, low volatility market in 2014 as the two opposing forces of reduced stimulus and slightly better-than-expected economic growth fight each other to a draw. Stocks go nowhere in the end with little gyration to speak of. Incidentally, this would be the outcome that frustrates the most players – all the passive index johnny-come-lately’s who require a rising tide don’t get it, all the long/short hedge funds and vol-starved traders don’t get their desert oasis in this scenario either. Bear in mind that many of us are beginning to use 1994 as our analog here and for good reason – it’s a mid-bull market year shortly after recession with a pickup in earnings but with interest rates beginning to rise as well. In ’94, you got 20% growth in S&P earnings but a flat market because rising rates led to a 25% compression in PE multiples. That particular rate hike cycle involved the Fed Funds Rate rising 300 basis points and it took place over 14 months. Once it was completed, in early 1995, the S&P 500 was off to the races for the next five years. I wouldn’t fall out of my chair if we went through something similar now as rates normalize and stocks digest huge gains. Consolidation is terrific and I certainly would much prefer to correct through time rather than through price any day of the week.
So far, now seven full months into the year, this guess looks pretty good. I made three others, but this was my leading hypothesis. None of my guesses included the onset of a new cyclical bear market, by the way, but one of them was an obligatory black swan thingie.
Anyway, not so surprising to find ourselves here. Nor should it be particularly upsetting to those with diversified portfolios.