Preparing for a Volatile Year
by Byron Wien, Vice Chairman, Blackstone Advisory Partners LP
February 2014
Last year’s Ten Surprises had a cautious tone. 2012 had been a good year for the market, but I expected the United States economy to experience slow growth in 2013 and I was worried that corporate revenues would only increase modestly. As a result I thought profit margins ran the risk of peaking and earnings could be disappointing. As it turned out, the economy did only expand slowly throughout the year, profit margins were essentially flat and revenues were not robust. Share repurchases were strong, however, as companies used the considerable cash on their balance sheets to reduce the number of outstanding shares, and therefore increases in earnings per share were pretty much on target. Corporate net income for the year was less impressive.
The Federal Reserve remained accommodative throughout the year, increasing its balance sheet by over $1 trillion through aggressive buying of Treasurys and mortgage-backed securities. A large part of this liquidity found its way into financial assets, keeping interest rates low and causing equity prices to rise.
The Standard & Poor’s had a total return of 32.4% for the year.
By the end of the year, the U.S. economy was doing better. The bright spots included vehicle sales, housing and energy production. Job creation remained slow, but the unemployment rate improved as frustrated people seeking employment dropped out of the work force. In Europe the recession was expected to end and limited growth was projected for 2014. The European Union remained intact and the euro looked like it would endure as the continent’s currency, but few structural reforms (like a banking union) had taken place. Shinzo Abe’s policies of fiscal and monetary expansion were working in Japan and the economy there was about to start growing again. China continued to expand at a 7.5% rate, but growth in other emerging markets slowed and their stock markets had another difficult year. Nonetheless investor attitudes, buoyed by the strong performance of the developed markets, were positive at year-end.
In the United States some fundamental reasons for optimism were also developing. The Purchasing Managers Index for manufacturing was showing consistent strength and capital spending was expected to improve. Projections for U.S. economic growth for 2013 moved up to 2.5% from 2.0%. While the economy is not yet accelerating, this positive shift had an influence on the Ten Surprises of 2014.
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