Thoughts for 2014
Board: Value Hounds
Like anyone in the market, 2013 has been a great year. All the accounts at record highs.
It makes me nervous.
I think the economy is actually entering a full-recovery phase. The oil & gas finds in the U.S. are driving a huge manufacturing advantage for the U.S. with cheaper energy than the rest of the world--not to mention tons of direct and indirect jobs in the oil patch. This is supported by rebounds in the auto and housing markets. The auto sector is pretty much fully recovered. The housing market has a long way yet to run. I think new home construction for 2013 will come in at a bit less than 1 million units, compared to a long-term average of 1.5 million units. Still a few years of growth there. Prices have stabilized, and interest rates, while rising, remain remarkably low.
Don't fight the Fed. Interest rates will remain low, but QE is ending. If the economic recovery continues, rates will begin to rise. Probably not a headwind at this point, but the Fed will no longer be providing a tailwind.
This has me worried. A number of valuation metrics are at very high levels. Mungofitch has posted a few times about the record level of the price/sales ratio of large companies, and other typical measures like the market P/E are also pretty well above average valuation.
It feels like the internet bubble all over again. The laggards in the portfolio are the ones which didn't double in 2013. What? You didn't buy Twitter? (Neither did I to my wife's chagrin.) Even though it made no sense at $40, it went to $70 in a few weeks. Bullishness is at very high levels and ridiculously valued "leaders" keep rising. Plus, the bull market is very long in the tooth. I can't find a good mungofitch post with historical data, but I believe this bull market is running into the "very long" part of historical data.
Verdict: Very bearish
What I'm doing
Over the past few months, I've been raising cash. I've been trimming my positions in stocks which are very highly valued (CREE, ARMH). I'm also trimming my positions in some value plays which have underperformed (CSCO) where I think I was basically wrong. I'm keeping my pharma (except ABBV, which I sold) and oil & gas because I view them as "forever" stocks and any sell-off will simply mean higher dividend reinvestment for a while.
Meanwhile, I'm putting together a watch list. 2013 was a very busy year and 2014 looks even more busy, but I need to do it.
So, I don't believe in market timing. But that is what I find myself doing for 2014. Sitting on the sidelines, waiting for a market correction which might be a few years down the road.