How to Think About 2014

After a great 2013, the major indexes start the new year off in the red.

Jan 26, 2014 at 7:00PM

Last year was nothing short of astonishing for the major indexes. The Dow Jones Industrial Average (DJINDICES:^DJI) closed up 26.5%, while the S&P 500 (SNPINDEX:^GSPC) ended the year 29.6% higher and the Nasdaq saw a 38.32% gain. Because of the extreme nature of these moves, many investors were calling for continued strength in 2014. That may or may not happen, but I think it's important for investors to readjust their expectations of what the markets may do this year.

Why? Well, toward the end of December, market pundits were calling for the major indexes to grow by double digits again in 2014. Most were predicting around a 10% gain for the Dow and S&P 500 on the basis that the housing market was continuing to improve, unemployment was falling, and economic indicators for the U.S. were for the most part looking good.

The problem, as we've seen in the past few weeks, is that it's not just about what happens here at home. In our interconnected world, what happens in Europe affects the United States, a slowdown in China will hurt multinationals, and weak growth in emerging markets means businesses have to find new markets to expand to. While on the surface the U.S. looks to be getting stronger each month, the world at large appears to be stalling out. Last Thursday, for example, China's manufacturing numbers indicated that the country's growth is slowing, and that news came on the heels of Monday's report showing 7.7% GDP growth in 2013. Although that number beat the government's 7.5% target, it still equaled China's worst showing since 1999.

So what's going on?
At the end of 2013, most investors were more focused on how they did during the year and wide-eyed about the future. They weren't looking at China or at emerging markets and thinking a slowdown there could hurt them here, regardless of their exposure to those markets. Granted, it would have been difficult to predict that a few weak economic data points from around the world would have hurt the Dow as much as they did this past week, and it was perhaps even more difficult to predict that after the first four weeks of 2014, after such a great 2013, the Dow would be down 4.21% year to date.

Now, with that thought fresh in your mind, take a moment to think about what could happen in the next four weeks -- or the next three months, or nine months, or the entire year. A million different situations and scenarios can pop up.

So why worry about it?

The only thing we as investors should expect is that over time -- and I'm talking about extended periods of time, not just weeks, or months, or even a single year -- the markets will go higher. Readjust your expectations so that if the major indexes fall 10% this year, or if you just break even, you're OK with that. Last year was not a normal year, and investors shouldn't be disappointed if 2014 isn't similar -- because it most likely won't be.

So for the remainder of 2014, just know that you've bought good companies, that you're going to hold them regardless of market fluctuations, and, most importantly, that their values will rise higher than they are today regardless of what happens in the meantime. All it takes is some patience.

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