We closed 2013 with the Dow in record territory, cresting 16,500. Over the last several weeks, the Dow has fallen in several fairly sharp drops to 15,356 as of today’s market close. There are the inevitable claims this is the beginning of something bad. Commentators point to Bernanke’s retirement, skittishness overseas, weakness at home, and for some, just a general sense that the high was too good to be true.
We thought it important to reaffirm our belief that the economy is fine, that it will continue to grow, and that 2014 shouldn’t be a bad year. In fact, we still see upside in the broad equity market with a very reasonable likelihood that the Dow will close 2014 higher than it started.
Markets get spooked, and markets get excited. Irrational exuberance and unreasonable fear both make appearances with an irregular regularity. But they are both just what their descriptions imply: irrational and unreasonable. There is nothing we see in the economy – domestically or internationally – to suggest that a correction is needed or that 16,500 was excessive. In fact we see that level as being entirely appropriate for the current earnings environment and economic indicators.
Real GDP grew at an annual rate of 3.2% in the fourth quarter. Looking at it over the course of the entire second half of 2013, real GDP grew at a 3.7% annual rate. This means the economy grew 2.7% in 2013. These are not the signs of a recession, or even a substantial slow down. If for no other reason than this, we see the market returning to its 16,500 range. But, of course, there are other reasons to be optimistic.
Technology continues to expand horizons and opportunities. Whether it’s fracking, 3D-printing, the cloud, tablets, smartphones, apps, or genetics, technology is generating amazing products, new drugs and improving efficiencies. These benefits are widespread and helping all industries. The American economy remains robust and continues to grow, and the markets will eventually reflect those realities.
There is nothing to fear here, but plenty to celebrate. We will have more to say on all these topics in the months to come. For now, we stay the course and accept a little unevenness along the journey.