If there is an investment theme I would follow in 2014, it would be this:
Preserve your capital, be worried about the economy, and don’t for a second believe that key stock indices are going to provide returns like they did in 2013. This year may just be the year when the floor is taken out from beneath stock prices.
Why am I so bearish on 2014? It’s because I believe a perfect storm is in the making for key stock indices.
The main driver of key stock indices, corporate earnings, is under pressure. Of the 344 companies on the S&P 500 that have reported their corporate earnings for the fourth quarter of 2013, 3.3% of them surprised the market with better-than-expected earnings—43% below the four-year average “surprise” rate of 5.8%. (Source: FactSet, February 7, 2014.) Corporate earnings are far from exceptional.
In respect to the future, so far, for their first-quarter corporate earnings forecasts, 57 of the S&P 500 companies have issued negative corporate earnings guidance compared to 14 companies that have issued a positive outlook. (Source: Ibid.) Buying stock when companies in key stock indices are worried about their corporate earnings has never been a wise move.
Then we have the issue of the slow pullback on money printing by the Fed. The Federal Reserve is now printing $65.0 billion a month in new money as opposed to the $85.0 billion a month it printed in 2013. Not a big deal? It has been for the emerging markets, as the U.S. dollar strengthens and emerging market currencies collapse, putting further pressure on U.S. companies that sell abroad.
The investor relations manager at Microsoft Corporation (NASDAQ/MSFT), in the company’s fiscal 2014 second-quarter corporate earnings conference call, said “…without the impact of foreign exchange, revenue would have been higher by $196 million.” (Source: “Microsoft FY14 Q2 Earnings Conference Call,” Microsoft Corporation, January 23, 2014.) That $196 million would have gone right to the bottom line.
Microsoft is only one company that will be impacted by weaker foreign currencies. About half of the S&P 500 companies derive revenues from outside the United States. The more currency fluctuations there are, the higher the swings in corporate revenues and profits for 2014.
Finally, from a technical point of view, key stock indices aren’t looking very attractive. Look at the chart below to see what I mean.
Chart courtesy of www.StockCharts.com
After Friday’s payroll numbers, key stock indices like the S&P 500 had their best day since October (circled area in the chart above). But one critical thing happened on Friday: trading volume fell. A stock market rising on weak volume cannot be characterized as a rebounding market.
2014 looks more and more like 2007 to me (more on this in the next few days). Dear reader, if you are protecting your money for the long term, stocks might not be the best investment right now.