Us equity types have had it easy in 2013. We haven't suffered much of any pullback whatsoever. Bears have been disparaged, dissected and pilfered from to the point that they populate a small leper colony surrounded by dying weeds and various reptilian lifeforms. The nouveau rich investors of the social media sector abound as whatever is related to the sector bounces up in ways that are only comparable to the mid-cycle of the 1990s bull.
With 2014 upon us, the comfort with which bulls operate has been growing. With that growth has come a certain confidence in the form of increasing bullish forecasts. Gone are the days of low single digit growth forecasts. Investors are demanding a certain level of chutzpah from their local, neighborhood analyst.
You must realize by now that Wall Street forecasts are only an articulate, analytically driven reflection of the popular sentiment of the time. In other words, what Wall Street analysts do is gift wrap what investors are feeling in pretty words and a colorful bouquet of statistics, passing it off as original thinking. It is, in fact, group thinking that only serves the purpose of driving trends. Wall Street will never tell investors to be bearish in a soaring (think 2000) bull market. And it will never tell investors to be bullish in a brutal (think 2009) bear market.
I won't be alone with my bullish forecast, no doubt. I am bullish on 2014, despite the fact that I have more company than I have become used to over the past few years. All that means is that we are mid-cycle in a bull market. There is really nothing more to read into it than that. All the knee jerk sentiment analysts that simply believe that bullish talk equals a reversion to the mean forget that markets do tend to reward investors at times. Markets are not always as difficult as 2000-2010. There are loyal, angelic markets. And there are demonic, nefarious markets. An investors job is to know which type of market we are in and act accordingly.
Where will the surprises be in 2014? I think in two places:
1. 2014 will not be as smooth and effortless for bulls as 2013 was. After Q1 up until about August, a window opens for a relatively sharp, precipitous and unexpected pullback that will be brutal. It will likely be called a mini-crash by investors. Probably to the tune of 10% plus on the downside within a couple of weeks. It will likely be macro driven, with Fed policy being cited as a key reason for the violent reaction of the markets.
2. The markets will end 2014 substantially higher than most are expecting. This becomes especially true following the events outlined in #1, which will cause many to abandon the bull case suddenly. The upside in S&P into year end is to roughly 2200. From August to year end the markets should absolutely rip. The first half of the year, from February into July will be pretty volatile and generally disruptive in nature.
Barring a catastrophe of some sort over the next few trading days, the S&P 500 will be ending 2013 with a 25% plus gain. This type of gain has happened 8 times over the past 30 years. The average gain following a 25% up year in the S&P has been 15%, with only one year (1990) finishing negative. In fact, only 1992 saw a single digit percentage gain for the S&P following a 25% plus gain. Every other time the S&P 500 experienced a double digit percentage gain in the year following a 25% gain in the markets since 1982.
2014 will not be as lubricated a path towards success as 2013 was for investors. However, the impetus to avoid exposure because of the simple fear of heights should be avoided. We are in the middle (it can certainly be argued early) stage of a secular bull market. The meat and potatoes in terms of investor gains comes in the late stages, which are still years away.
In the meantime, volatility will increase both on the upside AND the downside, with 2014 being a preview of the kind of awe inspiring, short-term bearish cataclysm that awaits investors who are over-leveraged or exposed to the wrong sectors at the wrong time.
