December 2013 Market Commentary
Stocks continued on their upward trend in November, pushing the year-to-date total return in the S&P 500 Index to 29.1%. While this strong market performance has been welcome, it also raises the concern that the market may be due for a correction. Stock prices have risen much faster than company earnings over the past year, making valuations less attractive. Although the economy is still expanding, it still requires a significant amount of support from the Federal Reserve in the form of the current bond buying program.
The Fed's bond buying program is intended to keep interest rates low, which makes it cheaper for businesses and consumers to borrow and then spend on goods and services. Lower interest rates also cause investors to seek a higher return by investing in riskier assets such as corporate bonds and stocks. So the Federal Reserve is also supporting higher asset prices by creating demand for riskier assets. So far this strategy has worked well, but eventually the Federal Reserve will need to reduce that amount of stimulus it is providing the economy. The main question facing investors as we head into 2014 will be how the "risk" assets such as corporate bonds and stocks will react to the reduction of bond buying.
With the stock market near record levels and signs of market speculation increasing, it seems that a degree of caution is warranted. In addition to being dependent on Federal Reserve policy, markets will also be impacted by Federal budget stalemate and negotiations to raise the Federal debt ceiling. Corporate revenues and earnings continue to grow, but the future economic environment is very much dependent on the successful actions of government leaders. Looking ahead, stocks may continue to rise as economic conditions improve, but considering the uncertainties investors could experience greater volatility and more moderate returns in 2014.
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The information presented is for informational purposes only and are not to be used or considered as an offer or a solicitation to sell or buy securities, investment products or other financial instruments. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering any transaction in relation to any securities mentioned in this report.
Source: Bloomberg, Haver, Guggenheim Investments. Data as of 3Q2013 for market cap, 2Q2013 for GDP.
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