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2013 Year In Review

2013 Year In Review

Every January, it’s customary to take a look back at the year that was. What were the highlights? What were the lowlights? What got us to where we are today? What were the events we’ll always remember?

Perhaps the most important question is, “What did we learn?”

I think the biggest lesson we learned is not to overreact to what we hear in the news. Much of 2013 was dominated by a jittery media that constantly forecasted doom and gloom at the slightest provocation. If you turned on the TV at all this year, you probably heard about numerous things that could derail the economy or sink the markets. The year was filled with prophecies that never came to pass. Let’s review some of them.

THE FISCAL CLIFF

Remember this? This time last year, it’s all we ever heard about. It was the combination of simultaneous budget cuts and tax increases that, taken together, could have possibly caused our economy to shrink, bringing about a second recession.

It was an important topic—everything I’m about to recap was important, in its own way—but the fear that it prompted was unwarranted. It was never likely that we would reach the fiscal cliff, or that the effects would be as bad as some predicted. And indeed, Congress reached an eleventh hour agreement (this will become a theme) to avert the worst of the fiscal cliff’s effects.

Despite all the worry, the economy kept chugging along, albeit slowly, and the markets did just fine: both the Dow® and the S&P 500® finished the first quarter with record highs.1

BERNANKE, BONDS, AND BUZZWORDS

Around May and June, you probably started hearing a lot about the Federal Reserve and its chairman, Ben Bernanke. The chatter was all centered on numerous financial terms and buzzwords like “tapering,” and “quantitative easing.” This had to do with the Fed’s massive bond-buying program. For several years now, the Federal Reserve has been buying bonds at an incredible level, to the tune of $85 billion a month. This is called “quantitative easing.” The Fed has been keeping interest rates low through buying bonds, essentially by putting “new” money into circulation for the first time. In short, think of the Fed buying bonds as if it’s trying to fill a gigantic swimming pool full of cash. The more it throws into the pool, the more is available for others to use. The more that’s available for use means the more that is available to lend ... which is what keeps interest rates so low. It’s a handy short-term prop for our economy.

This program couldn’t go on indefinitely. So in June, Bernanke made the following statement:

“If the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of [bond] purchases.” - Ben Bernanke2

The result was a lot of investor angst fueled by media speculation. The S&P 500 initially dropped 1.4% while bond yields began to rise.3 The fear was that if the Fed removed its crutch, the economy would topple, mostly due to skyrocketing interest rates.

But tapering didn’t come immediately, interest rates didn’t skyrocket, and everyone had a chance to take a deep breath and get used to the idea. So when the Federal Reserve announced they would begin tapering starting in January of this year, the markets not only reacted more calmly, but positively. The Dow and the S&P 500 both closed at record highs, while bond yields barely moved at all.4&5 Once again, there was never any need for panic in the first place.

THE DOG DAYS OF SUMMER

Overall, the markets have had a very good year, but that hasn’t stopped many pundits from predicting a market correction. There was a lot of talk about it during the summer especially. The markets had gone too high, many said, so a correction was “due.” Others worried about the aforementioned tapering, or even a war with Syria.

In August, war with Syria seemed like a real possibility. Previously, Barack Obama had declared that if Syrian president Bashar al-Assad ever used chemical weapons against his enemies, he would have crossed a “red line,” a line that merited a U.S. response. So when the news broke out that Assad actually had used chemical weapons, it seemed like another Middle-Eastern conflict was on the horizon.

As you know, war never happened. Obama decided to solicit Congress for support, and in the interim, the United States and Russia brokered a deal whereby Syria would gradually give up its chemical weapons in return for Obama staying his hand.

This is really more of a political issue, one that I won’t weigh in on here. The point is that another potential crisis was averted and things returned to normal.

THE AFFORDABLE CARE ACT (OBAMACARE), DEBT CEILINGS, AND GOVERNMENT SHUTDOWNS

And by “returning to normal,” I of course mean a return to political gridlock in Washington. In this case, the gridlock was mostly over three issues: the rollout of the Affordable Care Act, a potential government shutdown, and whether to raise the debt ceiling or not.

All three subjects prompted a lot of handwringing. Pundits asked themselves, “What if the Affordable Care Act makes unemployment rates go up? What if we don’t raise the debt ceiling and the U.S. ends up defaulting on its obligations? What will happen if the government shuts down?”

Again, I won’t comment on the politics involved. The message here is that the Affordable Care Act enrollment started on October 1st, and while the process was riddled with problems, it hasn’t negatively impacted unemployment rates, nor the economy at large. At least, not yet. On the same day, the government also shut down most of its non-essential operations, leading to round-the-clock coverage by most of the major news networks. While the shutdown had its ill-effects, especially on government employees, it wasn’t the economic disaster that many feared. Actually, the economy added jobs in October, and the markets finished the month on a positive note.6&7

Finally, Congress resorted to its tried-and-true playbook and reached a last-minute deal to raise the debt ceiling through February 7th, thus staving off a credit default.

SO WHAT DOES IT ALL MEAN?

Whew! That was a lot to recap. 2013 was a hectic year. But in many ways, it was the year where the worst never happened. That doesn’t mean the worst can’t ever happen, of course, but the fact remains: we shouldn’t overreact. When it looks like the worst is happening on Capitol Hill, it usually won’t. When it looks like the market will lose its head over a bit of bad news, it usually won’t. And when it looks like a storm will last forever ...

You guessed it. It usually won’t.

Again, all these events—the fiscal cliff, tapering, the debt ceiling, etc.—were important. They do matter, and we should absolutely keep ourselves educated about them. In a sense, the media is doing a great service by providing such relentless coverage: it ensures that we won’t often get taken by surprise.

After all, I’m sure 2014 will have its share of storm clouds, and as they come up, I’ll do my best to keep you informed. But whenever you turn on the TV, tune into the radio, or open up a newspaper, remember the lesson of 2013: don’t overreact to what you hear. Don’t waste your life always fearing for the worst. Furthermore, don’t sweat the daily waves you see in the markets. It will only make you sea-sick.

What we should do, always, is concentrate on what your goals are and what strategy we’re using to help you achieve them. By having concrete goals, and by having a strategy, you can weather any storm the world throws at you. So the next time you hear about gridlock in Washington, or a dip in investor confidence, remind yourself that it’s not about what other people do. It’s about what you do.

To that end, I’d love to sit down with you and plan for the year ahead. We can review your current strategy and portfolio. Do we need to make changes? Are you still on track to reach your goals? These are the questions to ask and the issues to focus on.

So please give me a call at 301-791-7910, or shoot me an e-mail at jeff@bowersinsurance.com We’ll set up a time to talk, and together, we’ll make 2014 exactly what you want it to be.

From all of us at Bowers Advisory Group LLC, I hope 2013 was a great year for you. Let’s make this one even better. Happy New Year!

1 Hibah Yousuf, “Dow and S&P at record highs,” CNN, March 28, 2013. http://money.cnn.com/2013/03/28/investing/stocks-markets/

2 Steve Hargreaves, “Fed sets road map for end of stimulus,” CNN, June 19, 2013. http://money.cnn.com/2013/06/19/news/economy/federal- reserve-stimulus/index.html?iid=EL

3 Hibah Yousef, “Dow sinks 200 points after Fed hints at stimulus easing,” CNN, June 19, 2013. http://money.cnn.com/2013/06/19/investing/stocks-markets/index.html

4 Caroline Valetkevitch, “Dow, S&P 500 end at record highs,” Reuters, Dec. 18, 2013. http://www.reuters.com/article/2013/12/18/us-markets- stocks-idUSBRE9BC0GG20131218

5 John Waggoner, “Bonds behave themselves despite taper,” USA Today, Dec. 18, 2013. http://www.usatoday.com/story/money/markets/2013/12/18/what-to-watch-bon...

6 Alain Sherter, “Job market shrugs off government shutdown,” CNBC, November 8, 2013. http://www.cbsnews.com/news/job-market-shrugs- off-government-shutdown/

7 S&P 500 between October 1, 2013 and October 31, 2013. Yahoo Finance. http://finance.yahoo.com/echarts?s=^GSPC+Interactive#symbol=^gspc;range=20131001,20131031;compare=;indicator=;charttype=area;cr osshair=on;ohlcvalues=0;logscale=off;source=undefined