Triskaidekaphobia

Lucky 13 1

I don’t have Triskaidekaphobia as far as I know, but I’ll be glad to see 2013 come to an end. During 2013 we saw an improving economy with growing employment, solid corporate profits, and rising housing prices that contributed to new record highs for the stock markets. Why should 2013 bother me at its end when it has been a great year? Have we come too far, too fast?

After Tax corporate profits — Corporate profits are key in the determination of a company’s stock price. When corporate profits are rising, then stock prices will likely rise; when profits are falling, then equity prices will probably decline as well. Corporate profits are one of the more volatile series on a yearly basis. Profits are the residual – the left over – from revenues after expenses are taken out – and taxes for after-tax corporate profits. While each component (revenues, expenses, and taxes) is not that volatile, the net is.
Data Source: Haver Analytics

Well, who knows? The Fed, by its actions, must certainly believe growth is sustainable in the short term. The rule of thumb has always been don’t fight the Fed. Congress has apparently removed most of the budget concerns. Globally, Japan’s CPI is finally beginning to reverse multiple years of deflation. Europe is on the plus side for GDP. Commodity prices are low. Oil is holding relatively steady and energy in general is providing a boost to the U.S. economy, however small at this point. Inflation in the U.S. is below Fed targets. Flows into U.S. equities have been historically low. Corporations are still cash rich and capital expenditures are predicted to increase.

Okay, I feel better now that I’ve gone over some of the factors pushing us forward. But I am still glad 2013 has come to an end. A stock market up 25-30% is outrageous when we still have a tremendous deficit, relatively high unemployment, interest rates beginning to creep up again, and minimal wage growth expectations. For the markets, the good is outweighing the bad and that seems to be the continuing trend. Slow growth on the economic front doesn’t necessarily translate to slow growth for the stock market. Watch for consumer spending/ personal consumption expenditure upticks in the earlier part of 2014. It’s the biggest component of GDP.

In the weeks ahead, we’ll also be reviewing Q4 corporate earnings. While these numbers are likely strong, the market may already be foretelling a slower pace going into 2014; especially with the recent stock market activity on Jan 2^nd. In general, as January goes, so goes the year. While it is far from a rule, a decline for the month would be enough to trigger further re-balancing. For now, we remain largely bullish with good news still outweighing any bad. We’d need to see declining home prices, deflationary pressure, worsening unemployment claims, or some unpleasant geopolitical news to give credence to any bear market concerns. It may be more the case that January is a period of consolidation when the market takes a breather from the brisk pace of 2013.

Happy New Year everyone and best wishes for a prosperous 2014!

The Week Ahead Watch List:

Mon Jan 6 – US non-manufacturing ISM for Dec.

Mon Jan 6 – US factory orders for Nov.

Mon Jan 6 – final Yellen confirmation vote

Tues Jan 7 – US trade balance for Nov.

Wed Jan 8 – ADP employment report for Dec.

Wed Jan 8 – Fed publishes minutes from the 12/17-18 meeting.

Thurs Jan 9 – US jobless claims

Thurs Jan 9 – retailers report Dec sales.

Fri Jan 10 – US jobs report for Dec.

Norm Deitrich Investment Analyst The Sarian Group @ HighTower