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We can just about close the books on 2013.
The CliffsNotes version of how stock market trends in 2013 will be remembered is something most investors already know. Stocks thrived, achieving their best annual return in a decade. Commodities such as gold and silver struggled due to the lack of investor fear. And more companies went public on U.S. exchanges than at any point since 2004.
But there were other trends that could have ramifications that linger well beyond 2013. Looking more at the big picture and not exclusively through the “what happened in 2013” lens, we learned a great deal about U.S. markets this year. Those lessons could be valuable as you decide how to invest in 2014.
Three Stock Market Trends in 2013
Quantitative Easing = Bull Market. In response to the worst recession since the Great Depression, the Federal Reserve issued its first round of “quantitative easing” – buying back billions of dollars in bonds every month to help stimulate the struggling economy starting in November 2008. “QE1,” as it has since become known, lasted until March 2010. During that time, the S&P 500 gained 37%.
Seven months later, QE2 was initiated in November 2010. That lasted until June 2011, and stocks advanced another 10% during those eight months.
The latest round of quantitative easing, QE3, began in September 2012. Stocks have shot up 22% since then, shattering all-time records in the process.
In the 39 months that quantitative easing has been in place, the S&P has risen a combined 70%. That’s an average of 21.5% annually. As long as QE3 is in place, expect the ongoing bull rally to continue.
Investor Fear is all but Absent. Just look at the VIX, a.k.a. the investor fear gauge. It’s less than a third as high as it was in 2011, when European debt concerns dominated U.S. markets. It’s one-quarter as high as it was during the recession. Not since 2007 has the VIX been this low.
The absence of investor fear was reflected in the market’s response to a number of supposedly cataclysmic events. Sequestration, the debt deadline, the 16-day government shutdown – none of it put much of a dent in the ongoing bull rally. That’s a far cry from two years ago, when the European debt crisis created mass chaos and uncertainty on Wall Street.
This year’s myriad domestic financial issues did little to prevent investors from buying stocks. At no point since the recession have investors so unconcerned with macro issues. For now, fear is dead.
A Pullback Isn’t as Imminent as Many Analysts Say It Is. We’ve heard it time and again over the past year: Stocks were overbought, the economy wasn’t growing fast enough to warrant these inflated share prices, bull runs never last this long without a pullback. Since the first few months of the year, that was the theme. And stocks have continued rise to new heights every month.
It’s true that no bull run lasts forever. But there have been longer rallies than this. From October 1990 to October 1997, the S&P went 1,767 days without a 10% pullback. From March 2003 to October 2007, stocks went 1,153 trading days without a 10% pullback.
Right now we’re at roughly 550 trading days without a major pullback. That’s chump change compared to those previous “droughts.” As for stocks being overbought, keep in mind that the S&P is trading at a lower P/E than it was from 1998-2005.
That doesn’t mean stocks aren’t technically overbought. It just means that stocks have sustained rallies before when being far more overbought.
A correction may be coming. But if the stock market trends in 2013 taught us anything, no one can tell you with any certainty when it will happen.
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