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At this time last year, the S&P 500 was already up 9% on the year and was closely mirroring two other years which saw unrelenting advances: 1954 and 1995. The equity market would go on to maintain a high correlation with ’54 and ’95 throughout the year, closing out the year at new all-time highs.
At year-end, we repeatedly cautioned investors not to expect more of the same in 2014. 2013 was a highly abnormal year in many respects. Not only did the S&P 500 rally throughout the entire year without ever testing its 200-day moving average, but it also experienced this historic advance while all other major asset classes did not participate.
Thus far in 2014, investors are quickly seeing just how much of an outlier 2013 was. We have already experienced a 6% correction and with the exception of Emerging Market equities, all of the major asset classes that underperformed the S&P 500 in 2013 are outperforming this year (see table below).
Additionally, we are observing more typical intermarket behavior, with stocks and bonds moving in line with inflation expectations. If you recall, U.S. stocks ignored declining inflation expectations for most of last year, which was extremely rare in a historical context.
Looking back in history, the year that is most correlated with 2014 thus far is 2010 (see table below).
In 2010, similar to this year, after weakness in January into early February, the S&P 500 would experience a sharp rally to new year-to-date highs (see chart below). In 2010, this rally would continue until late April after which the S&P 500 would go on to suffer the “flash crash” and a 17% correction. After this correction, 2010 would end the year with a rally to new highs.
While these analogs rarely follow the same path, at the very least the comparison with 2010 is confirming our prior analysis pointing to higher volatility this year. In light of this analysis and the extended U.S. equity market gains 5 years into the Bull Market, investors should be placing a higher emphasis on risk management here. At this point in the cycle, the words of Paul Tudor Jones are particularly instructive: “Don’t focus on making money; focus on protecting what you have.”
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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