2013 wasn’t a good year.
It was an incredible year.
Entering its fifth year of the bull market, the S&P 500 actually gained steam and surged 30%, booking its best year since 1997.
No one saw this coming. The most bullish strategist at the beginning of the year expected the S&P 500 to top out at 1,615 this year, a level the market cleared in May.
But this conservative forecasting was understandable as we entered the year with a “fiscal cliff,” continued with the threat of massive federal budget cuts, and entered Q4 with a government shutdown.
Raymond James’ Jeff Saut has a nice summary of all of the worries plaguing the markets in the recent past:
Speaking to the news backdrop, consider this. For the past two years the markets have been confronted with numerous issues. The debt downgrade, the fiscal cliff, the sequester, the government shutdown, Dodd-Frank, rumours China would implode, the call that interest rates would skyrocket, Europe’s debt crisis, a potential U.S. debt default, Fukushima, the Arab Spring, Iran, North Korea, Iran, Egypt, Syria, etc., yet the equity markets traded higher…
Citi’s Tobias Levkovich took a similar tone in a note to clients on Friday:
Who would have “thunk” it? A market soaring 28% was not in almost anyone’s calculation back in late December 2012 since the probabilities of such a gain were extremely low given S&P 500 history. Imagining a bipartisan budget agreement in Washington without rancorous rhetoric similarly was not on any pundit’s prediction list, especially after a nasty government shutdown. And, yet, the Murray/Ryan bill was just worked out. Moreover, despite the botched roll out of the Affordable Care Act/Obamacare program, the economy seems to be gathering some steam even in the face of health care uncertainty. In this context, it has been a year of surprises…
This year’s rally amid all of this worrying reminded us of Warren Buffett’s 2008 op-ed for the New York Times, which was published during the darkest days of the financial crisis. Here’s an excerpt that rings true today.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 per cent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
We’re not trying to suggest that Warren Buffett could’ve or would’ve predicted any particular year would see such huge returns in any given year.*
But the lessen is that there will always be reasons to be worried. Yet the markets manage to bounce back because the people driving the economy aren’t going to just drop out and let the world come to an end.
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” said Buffett.
People who have followed that rule really have something to celebrate these days.
*From the NY Times op-ed: “Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now.”