2012 was a great year for stocks. Already, in 2013, the main indices are up 5%. Investors are piling into equities, apparently afraid of missing out. Have we reached the “tipping point”, when allocations to bonds should be reduced and equity allocations increased?
Certainly, there has been some very good news recently:
- Washington avoided the “fiscal cliff”
- European leaders seemed intent on saving the euro
- The U.S. debt ceiling has been raised for three more months
- The Fed and other central banks have pledged to continue monetary easing
- China’s GDP growth is up in the fourth quarter to a 7.9% rate from 7.4%
- The housing market recovery seems to be continuing
- New claims for unemployment benefits fell to the lowest level in five years.
All good news. But, let’s put it in perspective. Yes, the current financial crises seem to be under control. Yet, the global economy is not back on track yet. Ken Rogoff, Harvard economics professor, put it this way at World Economic Forum in Davos, Switzerland last week: “It is a little bit calmer, but it is not very pleasant.”
Here in the U.S., our economy is healing, but slowly. The initial forecasts for 2013 were 2% growth in GDP. Now, with the rise of payroll taxes on employees, the new forecasts are for 1% growth. At the same time, the IMF expects the euro-zone economy to shrink by .2% this year. Unemployment in Europe is 12%. With continued austerity programs and tight credit, Europe may not return to growth for some time.
At Davos, a key buzz word was “structural reform.” Europe still is plagued by its lack of competitiveness. And, here in the U.S., the fiscal cliff was avoided by basically “kicking the can down the road.” We have simply averted major crises. The major problems in developed countries hindering global long-term economic growth haven’t been solved and haven’t gone away.
Yes, there are more positive signs today than 18 months ago, including the level of the major stock indices. However, as Brett pointed out in his last market commentary, stock market returns are not directly correlated with the global economy. The S&P 500 index may show good returns in shaky or even slow times. With the unsolved global economy headwinds, we are cautiously optimistic.
Hence, it’s a great time to review your asset allocation. An excellent time to review your risk tolerance, risk capacity and risk perception. And a perfect time to meet again with you DWM financial advisor.