Weekly Market Commentary | Week of December 16, 2013

posted 12/18/2013 in Investments

Highlights


A year ago, The Weather Channel decided it would start naming winter storms in an effort to raise
awareness and preparation. If this indeed works, then naming the coming storms in the stock
market in 2014 may be a great idea.


Get Ready for Market Storm Angel


Winter Storm Dion shut down airports, schools, and businesses in parts of the United States last
week in the midst of the holiday shopping season, but it is unlikely to have had a measureable
economic impact or to cause a storm in the markets.


Yes, winter storms have names. For several hundred years names have been assigned to hurricanes
and tropical storms; the World Meteorological Organization is in charge of assigning names to those events. But just a year ago, starting with the 2012-13 winter storm season, The Weather Channel announced it would start naming winter storms in an effort to raise awareness and preparation.

If this indeed works, then it may be a great idea to apply to the stock market. Perhaps we should
name the stock market declines, or market storms, as they unfold during the year in order to raise
investor awareness and preparation. An average year holds four market storms that have a
magnitude of greater than a 5% decline with at least one major storm that has a peak-to-trough
decline of 15.8% in the S&P 500 over the past 20 years. Even when excluding recession years, the
average annual peak-to-trough stock market decline is still over 10%, the magnitude that defines a
major storm.


We forecast a 10-15% gain for the S&P 500 in 2014 (Please see our Outlook 2014: The Investor's
Almanac for further information). However, we expect that gain to be accompanied by a few named market storms next year and could even see a major storm of 10% or more develop. There was little need to name the pullbacks in 2013 since all but one were less than 5%. The biggest of them was a peak-to-trough decline of just 5.8%, the smallest such move in a year since 1995. So, in 2013 there were clearly no major storms in the markets -- much like the 2013 Atlantic hurricane season, which was the first since 1994 to end with no major hurricanes. In contrast, 2014 is likely to mark the return of volatility.


The Market Storm Names proposed here for 2014 [Figure 1] also happen to be the top dog names for the year. Given Wall Street vernacular, it may seem like naming pullbacks after famous bears like Gentle Ben, Fozzie, Yogi, Winnie-the-Pooh, or Teddy would make more sense, but,
counter-intuitively, this just makes them sound too cuddly. Also, the storms are not bear markets;
they are just temporary pullbacks on the way to double-digit gains for the year.

The 2014 Farmer's Almanac predicts a major winter storm for February 2014. In our 2014 Outlook entitled The Investor's Almanac, we forecast a rise in stock market volatility in 2014 -- as some market storms are likely to develop. We expect those storms to be driven by the emergence of occasional "growth scares," as economic activity may not accelerate in a straight line. Temporarily weak data on jobs or demand-more than actions by policymakers -- are likely to drive the market storms in 2014.


When may Market Storm Angel -- the first of the 2014 market storms -- arrive? Weak economic data readings led to 5% or more pullbacks in the spring of each of the past four years. We may again see some seasonal weakness in the economic data that could fuel a market storm in the early months of the year. However, a spring pullback in the S&P 500 Index is very likely to be from higher than current levels, so there is no need to take action now. Instead it may be helpful simply to prepare mentally for a stormier market in 2014 than we experienced in 2013.


More market storms are not necessarily a bad thing for long-term investors. Greater volatility may
provide an opportunity to buy the dips in the market and for active managers to outperform their
benchmarks. In fact, the average U.S. large cap active manager has historically outperformed the
S&P 500 most of the time during periods of heightened volatility, defined by the VIX being more
than 2 points above its 3-year average. That compares to outperforming just 38% of the time when market volatility is lower, as measured by the Morningstar U.S. Large Cap Blend category.


Whether naming a market storm raises awareness in a positive way or prompts beneficial actions is debatable, and this proposal to name market storms is a bit tongue-in-cheek in keeping with the fun spirit of the holiday season. But it is important for individual investors to be aware of and prepare for greater volatility as they allocate to stocks in their portfolios.
  
 
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to
provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.


The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.


Stock and mutual fund investing involves risk including loss of principal.


INDEX DESCRIPTIONS


US Large-Cap Blend Equity category is fairly representative of the overall US equity market in
size, growth rates, and price. Equities in the top 70% of the capitalization of the US equity market are defined as large cap. The blend style is assigned to investments where neither growth nor value characteristics predominate. Managers invest at least 75% of their total assets in equities, and invest at least 75% of equity assets in US equities.


The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It
is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive it does measure the current degree of fear present in the stock market.


The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to
measure performance of the broad domestic economy through changes in the aggregate market
value of 500 stocks representing all major industries.


This research material has been prepared by LPL Financial.


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Tracking #1-230410 (Exp. 12/14)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
 
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