Each year around this time I write a predictions column outlining trends I anticipate over the next year.
I believe an effective multiyear investment strategy should consist of both long-term or core strategies as well as what I would call more focused tactical strategies using each investors shorter term expectations and insights.
In early 2013 I outlined the trends I expected for this year in the column and this week I will look back to see how I did. Next week I’ll outline some thoughts for 2014.
The dominant theme when I look back on my 2013 trends is I underestimated the velocity our markets and even our economy would achieve in 2013.
It’s been a full five years since the financial crisis, and it appears time does indeed heal all wounds. Let’s hope as our economy gains stream we can once again see our nation create opportunity and prosperity for all Americans, especially the young and those severely hurt by the Great Recession.
In January 2013, I anticipated continued upward momentum in stock prices. I also expected small- and mid-sized companies to outperform more defensive dividend large company stocks. Well, the Russell 2000 index of smaller companies returned nearly 40 percent during 2013, while the Dow Jones Select Dividend Index returned about 25 percent. While my fundamental expectation was validated, I would have never forecast these types of spectacular returns from either index.
By all standards the U.S. stock market has enjoyed a spectacular 2013. Markets like this need to be managed carefully, but for now I’m just enjoying the ride.
I also expected interest rates to rise as the Fed eventually scaled back its Quantitative Easing programs. At the time I wrote the column, the yield on the 10-year U.S. Treasury was at 1.76 percent and I expected it to finish 2013 with a moderate change and yield around 2.1 percent.
Once again, my general expectation was validated, but I very much underestimated the degree of movement experienced. Right now the 10-year yield is 2.99 percent, which represents roughly 8 percent decline in bond prices. This decline, after years of stable returns from bonds, has served as a major wake up call for investors and stands in my opinion as the dominant trend of 2013.
I also expected a period of quiet on the European economic front, and more positive attention to be focused on major Asian markets such as Japan and maybe even China. Europe has indeed been quiet, but once again the Japanese stock market, up 24 percent, exceeded my expectations. China on the other hand continues to struggle. The icing on the cake with this prediction, however, is Europe actually returned 24 percent as well.
2013 was an incredible year for financial markets, next week we’ll talk about 2014. Happy new year.