2014 Buyer Considerations – It’s Time to Revise Your Investment Strategy
Last year the Stock Market was the place to be with investments. The Dow Jones Industrial Average increased from 12,925 on January 1st, 2013 to 16,577 on January 1st, 2014. These were very impressive gains that were bolstered in part by an improving economy and the Federal Reserve’s bond-buying actions which were designed to stimulate the economy. The downside to the Fed’s action was that it artificially increased the value of stocks.
Unfortunately for the stock market, the Fed’s policy changed in January when the Fed chose to reduce its bond-buying in response to the improving U.S. economy. Since the beginning of this year, the Fed has reduced its bond-buying by $20 billion, from $85 billion each month to $65 billion now.
The impact on the stock market has been significant. Since the beginning of this year the Dow Jones Industrial Average has dropped from 16,577 to 15,596 as of today. In other words, the Dow has given back almost 30% of the entire gain seen by investors last year.
Movement in the DJIA short-term is not unusual. The real concern now is that the stock market could continue to correct in response of future reductions in the Fed’s bond-buying and stimulus policy, especially as the economy improves. In a typical year, stocks increase in value around 7%. If we use the average annual growth number of 7%, the DJIA should have increased 7% last year from 12,925, to 13,830.
If this number is realistic, it’s possible the stock market could drop even further this year, as the fed continues to reduce its bond-buying activity. The real question for this year should be: “Given the Fed’s plan to continue to reduce stimulus spending as the economy improves, is the stock market the best place to invest in 2014 and 2015?”
Given recent stock market activity and the present undervaluation of real estate, revisions to individual investment strategies should be given serious consideration.