In Redwood’s 2013 Review and 2014 Outlook, we noted that the core underpinnings to a healthy US equity market were intact, though a market correction was not out of question. We wrote that: “While any correction might be painful in the short term, in the absence of deteriorating economic or fundamental factors, we would view such a correction as constructive for future equity market returns.”
We remain positive on the US equity markets. While markets have been volatile and unsettling this calendar year, we encourage investors to resist the urge to try and time the market. Recall that over the mid- to long-term, US equities tend to appreciate 7% to 9% per annum and provide higher returns than almost all other liquid asset categories.
Following are some of our reflections about year-to-date stock market performance:
1. In our opinion, we are due for a market correction. 2013 was a tremendous year, and we haven’t had a correction of 10% or more in over a year. This doesn’t ruin, but rather, tends to strengthen, the bull market.
2. December was a very challenging month economically. The cold weather and the fewer shopping days before Christmas hurt consumer spending. Retail sales fell 0.4% in January and were revised down in December. Polar vortex and snow caused a dip in construction projects and manufacturing.
3. Economic indicators and corporate earnings reports have been tepid as companies prefer to be conservative and cautious about the environment going forward.
4. The policy change from increasing monetary stimulus to decreasing stimulus (still stimulus, but tapering) has caused havoc with emerging market currencies. Because most emerging market economies rely on imports of basic commodities like food, fuel, and metals, several countries have hiked interest rates dramatically (by about 500 basis points in Turkey) to bolster their weakening currencies.
These hikes will raise borrowing rates in those countries and slow economic growth. This slowing global growth outlook is being reflected back in U.S. equities, and causing anxiety and volatility to rise.
5. However, the structural pillars of continued strength in U.S. equities are intact. The US economy continues to grow at rates materially above the previous sluggish 1% – 1.5% rates.
Housing, autos and manufacturing are demonstrating material improvement, employment is improving, and corporate balance sheets are healthy. The Fed has signaled their confidence with the economic progress by beginning to taper their bond-buying program.
To summarize, the market correction reduces some of the recent frothiness and provides investors with an opportunity to buy high quality growth stocks at lower valuations.
DISCLAIMER: Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions. Past performance is no guarantee of future results.
