A Shaky Start

The market is off to a shaky start to 2014.  Why the small setback?  Simple.  Economic data here and abroad are calling into question the global growth story.  China's growth is slowing, and some emerging markets are in turmoil.  Recent economic data here show weakness as well, especially in manufacturing and car sales.  Frigid weather on the east coast had something to do with that.  Who wants to go for a test drive when it's 5 below or look at houses to buy?  

Here's my take:  economic growth will be faster than last year, but not by much and not good in the first quarter (maybe 2 percent) due to the weather.  Interest rates will tick higher, maybe to 3.5 percent for the ten-year Treasury later in the year.  What won't be rising are short-term interest rates, which will remain near zero all year and beyond unless growth accelerates (most unlikely given the jobs picture).  For that reason alone stocks won't be falling far and in fact will be the best asset class for the year.  Traders and short-term trend followers fail to see that.  Some were caught up in the brief downdraft and imagined much worse to come.  That won't happen as long as short-term rates stay low because the alternatives are not and will not be attractive anytime soon.  Sound familiar?  So investors will continue to buy the dips.

As for emerging markets, while there have been many times that selling in emerging market stocks and bonds briefly impacted U.S. equities, including last May, the effect was very short-lived and did not undermine a bull market, not in the late 1990s, not last May, and not during times in between.  Nor will trouble in Turkey or Argentina and elsewhere torpedo the bull market now.   Rattle it yes, which is understandable after a long bull run, but not derail it.  

Real estate brokers advise buying the best house you can afford in the best neighborhood.  That's also good advice when it comes investing.  The U.S. economy is the best neighborhood, so to speak.  Stocks are the best asset, the present turbulence notwithstanding.  So far, the stock market has retreated 5.7 percent.  In a perfect world, stocks would steadily advance in line with earnings, but our world is not perfect and sell-offs happen.   We've seen many and we'll see more.  Over the last four years those who bought the dips were rewarded.  I expect that now too.

 — David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.