Despite the stock market’s YTD run-up, student portfolio managers in the College of Charleston’s School of Business Investment Program are constantly asking themselves how much farther it can sustain this trend. The market has hit record highs multiple times over the past several months in the last year, but this unprecedented market behavior has also brought with it the threat of a plummeting decline.
As active money managers these students must always watch for small corrections, which help to stabilize the market but that can negatively impact the portfolio value, and the real-world actions that can cause them. They have compiled their five biggest present concerns fears, along with a few tips for avoiding losses, as we look toward 2014.
1. Asset pricing levels
The most obvious cause for concern centers around the fact that the markets have increased by almost 30 percent over the last year without a significant correction. Investment Program students naturally wonder how long the markets will be able to sustain such rapid growth.
This overarching fear trickles down to investors when asset prices are elevated relative to don’t have earnings, making value plays difficult to implement. At current levels, it is difficult to identity undervalued assets, making value-based investment management a difficult proposition. Investors must instead rely on growth beyond that currently justified by firm fundamentals, which is a worrisome proposition.
2. Action by the Federal Reserve
Perhaps the average investor’s greatest fear relates to uncertainty regarding the Federal Reserve’s plans. With new Federal Reserve Chairwoman Janet Yellen preparing to step in, money managers are concerned about how Yellen will change current policies, thus potentially dramatically affecting the economy. Despite the notion that Yellen is traditionally dovish, there exists the very real possibility that she will soon begin to taper the quantitative easing program, which would likely create significant volatility in the markets.
The student money managers note, “Over the past year, a mere mention of tapering has led to a near immediate correction within global equity markets.”
3. Analyst predictions
Many professional analysts have also begun arguing that the market is due for a double-digit market correction soon. Some of the country’s most respected investors and scholars say they are having a difficult time finding things to buy because stocks are fairly priced. Student investors recommend a healthy level of skepticism when looking at potential investments in 2014. A quick review of any financially related news item of late will include discussion of a possible “bubble”, which naturally has the potential to “pop” and create chaos in the market place.
4. Government shutdown
After October’s government shutdown, Congress postponed the deadline for a new long-term budget for the U.S. Government to early February. Though members of Congress are surely working to avoid it, another government shutdown is certainly a possibility.
This possibility could create a negative shock in the markets. For example, the October shutdown brought the S&P 500 from 1725.52 on September 18 to 1681.55 on September 30 (the night before the shutdown), a 2.61 downward correction. Student investors fear a repeat shutdown could induce more severe economic repercussions.
5. Bank rating downgrades
Finally, Moody’s Corporation recently downgraded many large U.S. banks, including Morgan Stanley, Goldman Sachs, and JPMorgan Chase among others. Since the American banking system was a driving force behind the 2008 economic collapse, such actions should not be taken lightly as they perhaps create a negative signal regarding the current state of the U.S. financial system.
Over the coming weeks and months, the student investors who have been carefully watching and managing the donation they invested with this fall recommend for investors be mindful of these market factors. Market conditions can change quickly, so the student investors advise that serious investors consider adding contingency hedging plans to minimize their exposure to the more risky market assets. Diversifying, both globally and across asset classes can help minimize some of the loss exposure. The conscientious investor should understand the current financial environment, objectively weigh the risk/reward tradeoff, and give careful thought to issues such as those raised above.