2014 is almost over.
And fear has dominated the news headlines for most of the year.
We had a war between Russia and the Ukraine, bombings in the Middle East, Ebola reaching the US, a military coup in Thailand, ISIS, fears of European recession, an actual recession in Japan, civil unrest in Ferguson, and Black Friday retail sales that were widely reported as being a bust (the implication being that the US consumer is broke).
We also dealt with the announcement that the Federal Reserve will end Quantitative Easing this year, which led to widespread fear that interest rates would soar, leading to a stock market and real estate collapse.
And we just witnessed a collapse in oil prices, which has renewed the fear of recession.
Meanwhile, the bull market in US stocks has kept chugging along. US stocks have continued to surprise both investors and market “experts” alike by returning 13% this year.
While stocks in Developed and Emerging countries have severely lagged US stocks, long-term US Government bonds are up an unbelievable 18%. (Bond prices and interest rates move in opposite directions. The reason why long-term bonds are up so much is because the corresponding interest rates have dropped quite a bit).
But the biggest winner this year has been US REITS (Real Estate Investment Trusts), returning a whopping 28% year to date. So much for rising interest rates hurting performance!
The biggest loser has been commodities, with a commonly used basket of commodities down 20% for the year.
This isn’t surprising since commodities usually have an inverse relationship with the US dollar – as the dollar strengthens against other currencies, commodity prices tend to fall.
And right now, the US dollar is at a seven-year high against major currencies. Not something anyone would have predicted back in 2008 when we thought we were on the verge of financial collapse.
The main lesson here is there’s no such thing as a sure bet in the stock market.
No one can predict which asset class will have the best performance, which is why maintaining a well-diversified portfolio is the best strategy.
This past week has been a rough one for the market.
We might even be on the verge of a correction (although I doubt it). It has been three years since we have experienced a 10% decline in US stocks – which is unusual, since this event usually occurs at least once year.
On the other hand, we are also entering the historically most-bullish time of the year for the stock market. And there is also research that indicates the high likelihood of strong market performance during this period in the presidential election cycle.
If your investment time horizon is longer than 25 years (including both the accumulation and distribution phases) then use any pullback or correction as a good buying opportunity. Remember that stocks, as a group, become less-risky after they fall in price. Use the recent weakness and bullish time of year to make your year-end IRA contributions.
Wish you all a very Merry Christmas, Hanukkah, Kwanza, or Festivus!