Three Key Lessons to Learn From a Wild 2013

At the end of every year, when trading activity slows down for the holiday season, I like to reflect on the 12 months gone by. The idea? To see if there are any lessons to be learned, lessons that can be applied to the next year to make it even more profitable and productive.

Here’s what I’m taking away from 2013 …

First, you simply cannot rely on forecasts or comments from Federal Reserve officials to guide your trading decisions. You may have already learned this one in 2006-2009. That’s when Fed officials spent a lot of time talking about the “well-contained” housing crisis and the healthy economy … right into the teeth of the worst crash and recession in decades.

The fact is, the Fed is notorious for getting important economic and market turning points dead wrong. Officials stay optimistic AND pessimistic for too long, and that’s why you have to anticipate when conditions will turn and position yourself for those turns. If you rely on the Fed to give you an advance warning, you will only cost yourself money.

The economy will heal itself as consumers start spending again.

That brings me to my second lesson from this year: Don’t underestimate the ability of the economy to eventually heal itself. We’ve had five long years of massive, unprecedented, crisis-era Fed policy aimed at a crisis that no longer exists.

That doesn’t mean we don’t have problems as an economy, of course. But a key lesson of 2013 is that as more time passes from the depths of a recession, the memory of that recession tends to fade.

Consumers eventually start spending again. Businesses eventually start investing and hiring again. The world moves on. That’s what I think we saw happen in the back half of this year, not because of QE, but despite it.

Third, make sure you understand the power a true growth cycle can have on virtually all capital markets. We saw stocks rise, bonds tank, and commodities generally slump (most notably precious metals) this year because investors were positioning themselves for a true, lasting cycle turn and economic rebound.

Unless and until we see signs the improvement is flagging, you’re going to see that pattern continue. It won’t just run out of gas on its own.

The pain will be particularly acute in the bond market. After all, we just concluded a multi-decade bull market for prices, and there are hundreds of billions of dollars in investor funds that are going to keep flowing out of bonds and into other asset classes.

The gains will likely be strongest in the asset classes that capture those inflows. I am particularly bullish on non-rate-sensitive, economically levered stocks that are in their own sector bull markets.

Finally, I wanted to take a moment to thank you for your continued trust and support over the past year. And I also want to wish you a wonderful and fulfilling holiday season — 2014 is right around the corner, and I can’t wait to help guide you through all its twists and turns.

Until next time,

Mike