January Market Update

Steve Cain, Director – Writer/Editor

It’s back. Seems like it’s been years since I’ve been able to say it. Not that I haven’t wanted to.

Steve Cain

Believe me, I have. But every time I’ve been tempted to declare that the economy was getting better, it seemed to stall out again, or something stupid would happen in Washington, or some turbulence abroad would scare the markets back down.
 
But as we look back on 2013, in spite of all of the many obstacles that were thrown in its way (and there sure were a lot), the economy seems finally to be back on solid ground. So yes, I’ll go out on a limb and say it again.
The economy is doing well and appears poised to continue to get even stronger into the New Year.
 
The most obvious evidence has to be the stock market which went on an absolute tear this year. The Dow Jones closed the year at a record-breaking 16,576.66. It’s hard to believe that just a little less than five years ago – on March 9, 2009, to be exact – the Dow closed at 6,547. I guess you can do the math as easily as I can, but I’ll do it anyway: the increase from that dark day in early March 2009 to Dec. 31, 2013 is 10,030 points, a stunning 153% recovery.
 
The gain in 2013 is a less impressive but still not-too-shabby 26.5%. The Dow was hovering around 13,000 at this time last year. Few then would have predicted that it would be so much higher twelve months hence.
 
But the markets are more a mirror of the wider economy than a driver. So the question is, what went so right after so many years of false-starts and treading water? How did the economy manage to overcome sequestration and a government shut-down courtesy of our elected officials in Washington, an on-going melt-down in Syria, a terrorist attack in Boston, and general turbulence throughout the Middle East and other parts of the globe?
 
There is no single answer to this question, but there are several truths that help explain the good eco- nomic year we’ve had and the surprising strength of the markets. First and foremost, the determina- tion of the Federal Reserve to keep both long and short-term interest rates low has had a huge impact on the stock markets. Low rates have been a big factor in the increasing profits of corporate America. Bernanke may be on his way out, but incoming Fed Chair Janet Yellen seems to be determined to maintain the Fed’s “easy money” policy, at least for now.
 
At some point, it seems clear that a strengthening economy will force the Fed’s hand. Rates will have to rise with some resulting negative impact on corporate profits and the equities markets. The hope is that the Fed is able to ease higher rates in without doing too much damage to corporate balance sheets while still preventing inflation from taking hold. It will be a delicate operation, but one we need to prepare ourselves for since it is surely coming.
 
But it’s not just low rates that have cheered the markets. Several other sectors of the economy are leading the charge to economic recovery, including technology, energy and housing which, until fairly recently, had been one of the sectors dragging the economy down. While the Coasts and En- ergy States will be best poised to benefit from these trends, Chicago is not exempt with a growing technology sector and rapidly improving housing market. All in all, there’s a lot to be optimistic about as 2014 begins. Happy New Year!