As we close the books on 2013 and open them on 2014 with varying degrees of trepidation and relief, let’s acknowledge that what has happened in the past shapes our expectations for the future, and the more recent those past events are, the greater a role they will play in determining how we prepare for the future.
In psychology, it’s referred to as the “availability heuristic,” and you don’t have to look very far to see how it works in finance: It’s the primary reason that most of us are very bad at picking market tops and market bottoms. And the larger or more dramatic a recent event is, the tougher it is for many of us to prevent it from lingering, front and center, in our minds. Little wonder, then, that so few investors were able and willing to turn bullish on the stock market as early as March 2009, only months after the massive financial crisis and in an atmosphere of tremendous uncertainty.
Of course, trends can remain intact for months or years. Moreover, while we like to think in terms of calendar quarters and years, it’s unlikely that the dynamics governing financial metrics are going to oblige by neatly realigning themselves at dawn on Jan. 1.
Still, the following short list of 2013 market phenomena is worth pondering as we head into a new year. Even if the markets don’t automatically shift gears, it’s a great time for us human beings to pause, question what that pesky “availability heuristic” is convincing us is true and reconsider those assumptions.
1. The stock market’s big rally has been named the top business story of 2013 by the Associated Press, and no wonder. It created trillions of dollars of new wealth for stock investors and shrugged off events that would in other circumstances have caused it to falter, from rising interest rates and underwhelming economic data to chronic dysfunction in Congress.
2. We may all have forgotten this in the last thirty years, but it's possible to lose money in the bond market. While interest rates may not rise all that much – and the Federal Reserve has said it won’t boost short-term lending rates in 2014 – odds are that market participants will let rates edge higher in the new year, triggering more losses among bondholders.
3. That brings us to the Great Rotation by investors, a phenomenon that began to register on the radar screen of pundits and market analysts in 2013 and is likely to gain a lot of ground in 2014 as folks reconsider the macro-level question of just how much of their portfolio they should invest in what appear to be newly risky bonds.
4. Momentum has mattered in 2013, and it’s going to continue to shape stock market returns in 2014 until something we can’t anticipate today suddenly stops it in its tracks. That’s Newtonian law in action.
5. For all the public angst about innovation, business creation and entrepreneurship, all appear alive and well. Just consider the way that Bitcoin has elbowed its way into the mainstream, or the discussion surrounding the 3-D printing industry. Odds are that a host of new businesses and industries will take shape in 2014.
6. Some of those new businesses will spawn companies that go public in IPOs, just as 3D printing companies ExOne Co. and Voxeljet AG did this year. But this year’s IPO market reminded us that not all hot IPOs belong to bleeding edge businesses: top performers included oil pipelines and restaurant chains.
7. And some of those gains will be here today and gone tomorrow, as Twitter’s big selloff in the final days of 2013 signaled. That’s the downside of that pesky momentum: When an analyst points out that a stock is rallying on nothing but momentum, the rush to the exits can be dramatic, too.
8. Another warning that high growth may be alluring but also volatile came from emerging markets. Investors tempted to invest heavily in this arena came to grief in 2013 as historically high economic growth faltered and new structural risks emerged, along with, in some cases, political conflict.
9. Paradoxes can endure, the big banks reminded us in 2013. Even as they battled big headwinds (record fines from regulators; new rules that they insist will limit profits; a big downturn in the mortgage market) they still managed to post higher earnings growth rates than any other sector.
10. Sometimes, what you think is logical isn’t. While the shortcomings of the new health care law’s technology backbone were the focus of much ire in November, health care stocks blithely turned in the best performance of all. For the year, they are handily beating the S&P 500, ahead 43.13 percent.
11. Health care companies also are ahead of the pack when it comes to capital spending, of which most industries have been very wary and which was lower for S&P 500 companies by the end of the third quarter of 2013 over year-earlier levels. Meanwhile, those companies spent 2013 recording quarter after quarter of record cash levels. Something’s gotta give; the cash has to start going somewhere.
12. All that cash has lured activist investors, and will continue to draw them to companies with piles of money on their books. Some activists came to grief in 20913 (see Bill Ackman, with J.C. Penney), but the jury’s still out on other campaigns, including Carl Icahn’s attempt to get Apple to cough up some of its own cash.
13. The economy. The Fed. Washington’s policymakers. None of these seemed likely to support the kind of big stock market rally we witnessed this year; at best, they created an uncertain climate that typically makes investors wary and edgy. Even earnings growth wasn’t all that robust, compared to recent years. And yet, the rally happened: Another reason to try and adjust for that pesky “availability heuristic” as we all settle down to think about what 2014 may have in store for us.
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