Well! We no sooner finish off the best year for equities in a long time, seeming to ignore the ferocious Taper and the troubles in emerging markets, then we hit January and a 3.5% decline in the S&P 500. Followed by another bad day to begin February.
What to make of all this?
First of all, keep the big picture in mind:
1. We had a gain of over 32% in the S&P 500 in 2013. Equities never go straight up indefinitely, so there is nothing surprising about a pullback like this, or even a “correction,” which is defined as a decline of 10% or more. That is one reason we rebalance portfolios when equities go way up or way down.
2. This does not mean the beginning of a long downturn. It might be that, or it might bounce back soon. It would be nice to know the answer ahead of time, but that information is unavailable.
3. Remember the bonds we were so worried about? Isn’t it great to have them at a time like this? In fact, did you notice bonds have gained a couple percent this year as equities have declined?
So, what are the big issues?
First and foremost, the soft economy is the main concern. As we have been saying since the recession in 2008, the recovery is very slow and is not creating many jobs. At the end of last year we got a few encouraging numbers about the economy and jobs, but now we are getting some lousy numbers again and people are not as optimistic. We are not promoting ourselves as having inside intelligence; this knowledge is widespread in financial circles. The numbers are what they are.
Perhaps to head off a few comments, let me point out that everyone following the economy knows this. There are different explanations and assignments of blame coming from different political people, but no one familiar with the data calls this much of a recovery, particularly not for employment.
To oversimplify a bit, Republicans and free market economists blame poor government policies for creating a bad business climate. Democrats and Progressives are blaming several factors, depending on whom you talk to. Some say the government’s approach to deficit spending was to blame because there wasn’t enough. We needed $2 trillion instead of one. Lack of demand is the problem–if we pumped more money in, people would buy more and the economy would grow, create jobs, etc. Basic Keynesian ideas.
Others say, and some write to us about it, that corporations are to blame. They are greedy and should be spending all that cash instead of accumulating record amounts, paying dividends, doing stock buybacks, etc.
We are staying out of those arguments because there is nothing we can do about any of that. If we are talking about your basic understanding of the economy and the markets, and making good decisions about your long-term investment strategy, we focus on reality as we can all observe it. We will leave the rest to the analysts.
Yes, the oft-mentioned Taper is back on the list of things to discuss. The Fed has started, but may need to pause if equities continue to decline. Stay tuned.
I would add, very briefly, that a number of emerging market countries from Turkey to Argentina are having some difficulties. That also affects our portfolios, although much less than the S&P 500 does. A bumpy ride to be sure, but the emerging market countries as a whole are a lot more solid, financially and politically, than they were back in 1998 when the last emerging markets crash occurred. Good to know.
Speaking of analysts…
We would like to share the following employment chart with you, from JP Morgan, showing that we have not even recovered the jobs lost during the recession that ended five years ago, never mind resumed growing our employment. A sad picture, a big problem. If the reported unemployment number, which has declined, confuses you, remember that it ignores all the people who are no longer officially classified as “looking for work.”1
The linked article from CNBC references a recently released Citibank study2. They attempt to figure out why companies are not investing and hiring, what policies discourage that and what companies are reporting about their plans. I thought it was a pretty good short analysis, for those interested in going a little deeper. We do not endorse any of that, but thought it worth sharing.