13 Things We Learned in 2013 - Part II
In the first installment of "The 13 Things Investors Learned in 2013," we explored the fact that the U.S. stock market was the best/only place to be this year. We talked about the idea that the periodic crisis-driven dives that had plagued the market for the previous four years failed to materialize this year as "no new crisis meant no meaningful correction." Then we touched on how sentiment had become incredibly lopsided at the start of 2013. And finally, we talked about the current role of HFT in the stock market game.
But before we launch into the second installment of lessons learned, it is probably a good idea to reiterate what investors might face in 2014.
First, it is probably a very good idea to enter 2014 with an open mind and your risk-management tools at the ready as the historical cycles are calling for a substantial decline in the first half of the year. So, while the asset allocators may make January another fun month for stocks, one shouldn't expect 2014 to be a replay 2013.
However, since using a crystal ball isn't always the best way to play this game, let's continue to look back at 2013 and the lessons that investors should have learned.
5. The Macro Guys Got It Wrong – AGAIN
One of the biggest mistakes investors made in 2013 was to fall in love with the idea that the macro view drives stock prices. With Europe's debt crisis showing no real signs of improvement and the folks in Washington continuing to act like children, the macro crowd decided that the crisis play book would continue to work in 2013. Boy, were they wrong.
The big lesson here is that the macro view doesn't always drive stock prices. Yes, it is true that economics and the macro view can and do move markets - at times. However, it is also important to recognize that markets "price in" problems over time - especially those problems that are widely known. And given that the EU had not crumbled during the prior three years, traders apparently moved on in 2013.
It is vital to remember that the focus of the market is a moving target. Just because traders were worried about the PIIGS in 2010, 2011, and 2012, didn't mean that the EU would remain the focus in 2013. Nope, the bottom line here is the crisis faded after Draghi pulled the bazooka out of the closet and the market began to look ahead to brighter days.
6. Diworsification Is a Thing
It is generally accepted that diversifying one's portfolio across asset classes will (a) reduce risk, (b) smooth out the ride, and (c) improve returns - especially during bear markets.
However, 2013 taught investors that there needs to be an asterisk applied to this hard and fast investment rule. You see, when investors wind up overweighted in a market that has been artificially inflated by central bankers for years and then that artificial support begins to go away, well, staying in that market may not be the best idea.
In short, investors should have learned that bond prices can go down as well as up. And given that the Fed will first stop buying bonds and then eventually begin to sell them, this is a VERY important lesson to understand going forward.
7. There is No Free Lunch In This Game
Speaking of the potential for a secular bear market in bonds, another takeaway from 2013 is that "setting it and forgetting it" in terms of the asset allocation in your portfolio is a thing of the past. Yes, I understand that some very smart guys have won Nobel Prizes for their work on diversification. However, there is little substitute in this game for being in the right place at the right time.
Another way to look at this is that investors have to earn their returns these days. Instead of expecting markets to act as they have in the past, investors have to pay attention to what's working now and what is driving the action.
8. QE - Everybody’s Doing It
One of the absolute biggest lessons investors should have learned from 2013 is an oldie but a goody: It doesn't pay to fight the Fed - especially when they are on a mission.
Cutting to the chase, investors need to recognize that a trillion here and a trillion there means that before long you’ve got a bull market on your hands! Why? Because, in short, all that money has to go somewhere. And with the U.S., UK, Japanese, and EU's central banks all in QE mode, there was plenty of money that needed to find a home in 2013. Also remember that money goes where it is treated best, which, in 2013, meant the U.S. stock market.
Does this concept make sense? Maybe not. Will it continue? Yes - until it doesn't. But don't forget, the most important lesson here is that fighting the Fed is usually a bad idea.
9. Oh Yea, THIS is What a Bull Market Looks Like
Unless you've been at this game for 15 years or more, you may not remember what a full-fledged bull market looks like. From 2000 through 2009, the stock market went through a bust-to-boom-to-bust cycle that scared most investors half to death.
However, since March 10, 2009, the game has been very different. While the ride has been rocky and there have been plenty of issues to worry about along the way, take a look at the chart below. Yes fans, THIS is what a bull market looks like.
S&P 500 Weekly
Sure, the joyride to the upside could end at any moment. Yes, the bears could cause fear to make a comeback in 2014. But the key takeaway is to recognize that the markets are constantly changing.
The current bull run will indeed give way to a bear eventually. So, don't be surprised when it does. But then, by the same token, don't be surprised when the bears go back into hibernation and the bulls return - remember, most investors weren't ready this time around.
Publishing Note: I'll be continuing my break from the keyboard this week but promise to get back to work when traders return to their desks next week.
Positions in stocks mentioned: none
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