Jitter In The Markets
If you follow the U.S. stock market at all, you are quite aware that 2013, while still not good as the far as the economy goes, was a great year for stocks. You'll also be in-the-know that 2014 was not off and running at the word go. I would classify this year so far—and admittedly it is early yet—as jittery at best. And I think this is in part due to having such a stellar year last year.
How high can it go? Will the bull continue to run or falter?
Both good questions, even though the first one seems to have some historical data to back up at least the basic thought that the it being the markets will eventually go higher, but not without a few hiccups along the way. But even huge hiccups can lead to some very interesting gains as we saw once the market hit its bottom with the DOW Jones Industrial Average plummeting down into the 6,000's, and the markets are higher today than they were then.
I tend to think that things might prove just a little bit shaky through the first couple of quarters of 2014, and maybe even into the 3rd quarter, and here's why; one thing weighting down the markets a bit is tapering. On another site I wrote that while I personally feel that tapering is a good thing, in my view a strong positive indicator for an improving economy, there are many investors—mainly on Wall Street—who know that part of what was propping up the U.S. stock market was the tens of billions of dollars being artificially poured into the economy by the Fed.
Why is this important?
Because a few things remain unchanged; take unemployment numbers for example. No, not the official number, but the real unemployment numbers. The U-6, for example, that suggests that there are around 91 million people under or unemployed. Keep in mind that the unemployment number put out by the labor department each month is only accounting for those who are on the unemployment rolls, receiving benefits, and actively seeking work. It does not account for those whose benefits have run out who are still not working. So, if you look at the real unemployment figures it is clear that the jobs market is not improving, and may actually be slightly worse.
That's one part of the equation.
There is also, of course, Obamacare which still weighs heavily in the minds of many as to what the real impact will be once it gets into full swing. How many jobs will Obamacare cost the American people? How much will the cost of Obamacare, not only to businesses, but to the American people as a whole affect earnings power, and what impact could it have on inflation?
Let's not forget that median household income has dropped by nearly $5,000 per year already.
So, continued high unemployment and lackluster jobs growth are also weighting down the markets because even the most savvy of Main Street investors knows that what really drives the U.S. economy, and ultimately the stock market is earnings. Americans need to not only have a steady stream of income. They need a steady stream of disposable income. Income leads to profits, and profits lead to hiring, and hiring and profits combined lead to growth in business and in the economy as a whole.
So, when you put all of these things together, and consider that tapering by the Fed—essentially pulling back on the amount of artificial propping up of the U.S. economy—investors have some fear that this may be a premature effort, and that the economy is not really ready to go it alone.
If that is the case, this will have an impact on future earnings by companies, and that will of course impact stock valuations.
There is another huge factor to consider in 2014 as well, and that is the fact that this also happens to be an election year. I don't think it would come to a surprise to anyone that as a general rule Wall Streeters do not favor the economic policies of this president, nor of the democratic party, and I tend to think they have good reason not to.
The democrats through their policies are stifling business, and through them have also left more and more people on the poverty line. People who may never return to the workforce. A thriving economy needs money flowing through it from the majority, and when the majority becomes the poor, not much money will flow into it. In fact, more money will be siphoned out of the economy to pay for those who are on the government dole. That leads to higher taxes, lower productivity, and hurts the economy and of course the markets as well.
So when it comes to the markets, and how well they may be able to perform, elections do matter a lot. If both the House and Senate can be controlled by the GOP, then the prospects for the markets will be more promising because the damaging policies of the democratic party can be curtailed a bit. It still means there will be some stagnancy through to 2016. But no more damage can be done. And that is seen as a positive.
However, until we know what the outcome of the 2014 elections will be, this leaves some uncertainty, and uncertainty always makes investors jittery and cautious, and slows down the bull, so to speak.
But there are still a couple of other things tending to weight down the markets, and they happen to be the housing market and the credit market. Both are doing better by all accounts. But not enough better. And both of these things tie quite directly into the economy, and the jobs market as well, both which are not yet looking much better.
GDP growth is abysmal.
No one is going to buy houses if (1) they do not have a job, (2) do not have confidence that their job is secure (or their income as a whole for that matter), (3) incur higher costs due to healthcare, or (4) do not have access to credit, or whose credit has been damaged due to the effects of the Great Recession and other economic factors including loss of median household income.
Do you think the stock market will be higher or lower at the end of 2014?
So what does all this mean to you and I? The average Joe Main Street investor who just wants to protect our retirement savings, and grow our money a little bit? It just means that we must understand what makes the Wall Streeters jittery, and what influences actually will have some impact on the markets as a whole. It helps us to decide who to buy when we consider buying stocks.
If we pick the right companies, then in many ways the jitters helps us out a little bit. Especially if we are looking longer down the road into the future for our gains, because the jitters put solid companies with strong balance sheets and strong business models on sale for us to pick up.
That all said, yes. 2014 will be shaky at best throughout most of the year. There is a lot going on that can have a great impact on the overall performance of the stock market without a doubt. But picking the right companies, doing our due diligence, and recognizing when a stock is just being beaten down due to the status quo, then we have a massive opportunity to take advantage of the jitters, and the things that pull the markets down, to enjoy great gains down the road.
It is something I have done over the years, trying to read between the lines, in order to realize better opportunities, take advantage of given opportunities, and beat the odds wherever I can. The markets are going to do what they are going to do, investors are going to do what they are going to do, governments are going to do what they are going to do. I cannot control any of those factors. I can, however, keep them in mind when deciding what I am going to do.
And so should you.