What’s going on here? After a record-breaking year in 2013 with the Dow Jones Industrials, the S&P, the Russell 2000 Index of small stocks, the mid-cap indexes and the Dow Jones Transports all ending at record highs, 2014 has started out with a thud as the S&P declined for the first three sessions of the new year.
This is now the first time since 2005 that the index has gone lower to start the initial three days of a new year, and the decline has been 1.2 percent. Nine years ago, the first three sessions produced a loss of 2.3 percent, which eventually turned into a 3 percent gain for the year. Before 2014, there have been seven occasions since 1928 when the S&P went lower for the first three sessions, but for six of those seven times it ended the year higher, so there is no reason to worry about this sluggish start yet.
Let us take one further look at what the market accomplished in 2013, which was certainly one for the record books. The S&P finished with a performance that was its 13th-best year ever and the Nasdaq had its seventh-best year of all time. And for those who want to be optimistic this year, let it be pointed out that the S&P has ended higher almost two-thirds of the time in the next year after a gain of 25 percent or better the prior year, as the S&P finished ahead by 29.6 percent in 2013. The market advanced last year in every month except June and August. These overall gains were helped by the fact that $162 billion came into the market in the form of inflows into equity mutual funds and equity ETFs, the largest such gathering of funds since 2000.
Of the 30 Dow components, 17 ended at their best levels ever and in one of the broadest market rallies in many years, 458 of the 500 S&P stocks ended higher for the year, the most since 1990. And despite the president being called a “community organizer” and a “socialist” in addition to his ostensibly being criticized as “anti-business” by his political opponents and various conservative media outlets and speakers, the market gained 117 percent from his January 2009 inauguration to the end of 2013. This phenomenal five-year performance has been eclipsed only by President Clinton’s time in office from his 1993 inauguration to the end of 1998, with a gain of 123 percent. These statistics go back to the 1930s, during which time we have had presidents from both political parties in office.
Economic reports this past week produced results that were near expectations, as weekly jobless claims declined to their lowest level in a month, the December ISM Manufacturing Survey slipped a bit from the prior month that was the highest since April 2011, November construction spending and November factory orders came in slightly above expectations but the December ISM Non-Manufacturing Survey, which covers 80 percent of the economy, declined slightly for the second straight month.
These reports are all a warm-up for the two major events this week, namely today’s release of the minutes of the F.O.M.C. meeting of December 18, which produced the announcement of the tapering program of $10 billion a month starting in January from the $85 billion a month of Federal Reserve bond purchases. Investors will be keen to hear the central bank’s rationale for this decision in greater detail. The main event will be Friday’s release of the December jobs report, for which the expectation is for an additional 195,000 positions to have been created after the prior month’s gain of 203,000 while the unemployment rate is projected to remain at 7 percent. In addition, there will be the usual revision of the prior two months and details on average hourly earnings and the length of the workweek. And as usual, any deviation from these expectations is likely to produce a strong market reaction one way or the other.
Chairman Bernanke gave what could be his last speech before his term concludes at the end of this month. On Monday evening, the Senate officially confirmed Janet Yellen to take his place by a 56 to 26 vote, with many senators unable to get back to Washington, D.C., because of the record-breaking cold weather gripping many parts of the country. All Democrats voted for her confirmation along with 11 Republicans, and all of the negative votes were from Republicans who have been concerned about the Fed’s expansionary monetary policies.
In his remarks, Mr. Bernanke said that the central bank is no less committed to highly accommodative policy despite the fact that it has reduced its bond buying program as mentioned earlier. He gave an upbeat assessment of the economy going forward but tempered it a bit by saying that the overall recovery “clearly remains incomplete.”
He mentioned that the tapering decision “did not indicate any diminution of the Fed’s commitment to maintain a highly accommodative monetary policy for as long as needed,” but rather “reflected progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012.” He concluded his remarks by saying that “the combination of financial healing, greater balance in the housing market, less fiscal restraint and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters.”
Overseas economies saw a mixed picture as 2013 came to an end, as opposed to strengthening signs in this country. Service industry growth slowed sharply in China but improved across most of Europe. This data implies that the record stimulus provided by central banks around the globe has had some impact and is not expected to come to an end any time in the near future. As an example of these discrepancies, Asian shares declined to a three-week low after the Chinese purchasing managers’ index dropped to a two-year low and raised concerns that the world’s second largest economy is perhaps on a slower growth path, which was mentioned in last week’s column as one of the worrisome signs going into the new year. On the other hand, business has improved in the Eurozone after that part of the world narrowly escaped falling into a prolonged recession, which gives hope for more balanced worldwide growth in 2014.
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
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