The following chart displays SPX calendar year returns since 1950, in ascending order; 2013 is highlighted.
The SPX is a long way from having its best year ever, but 2013 is currently among its top 10. Barring an FOMC decision on December 18th to taper the current pace of quantitative easing, the SPX will remain there. Two thousand thirteen was very much the year of the Fed (we’ll get to that chart in a later post).
Going back two months, consensus estimates for a December taper were in the significant minority. As an ironic side note, looking at consensus estimates from one year ago, a December 2013 taper was also in the significant minority; with the majority estimating a Fed taper around June 2013. To be clear, a continuation of quantitative easing is a statement of the Fed’s belief that the economy is not healthy enough to persist on its own.
Does 2014 have the performance potential of 2013? The following chart plots returns (y-axis) and realized volatility (x-axis) for the SPX (1950 – 2012).
For perspective, I’ve highlighted the years following >25% calendar year returns (with the crosshairs indicating 2013’s performance and realized volatility levels). If the past is any indication, 2014 will bring lower returns and/or higher volatility. That is not to say a 20% performance with a 13 realized volatility level is a bad year, though.
The next chart is a modification on the first–displaying the next calendar year’s maximum decline from that year’s close. For instance, 1954 is plotted on the far right with the largest drawdown over the next 12 months from the 1954 close (not intra-year declines).
Aside from the 17% pullback in 1990, none of the other 11 best performing years saw a price more than six percent lower from year-end. A six percent decline from current levels equates to about 1700 on the SPX.
With only seven calendar years producing higher SPX returns since 1950, it is probably safe to assume that 2014 will produce returns less than +25%; and a pickup in volatility is also probably warranted. But that doesn’t necessarily mean 2014 is due for a correction in equity markets.
Waiting on the Fed to ease their monetary stance from hyper-aggressive has proven too conservative over the past year. The upcoming year will also be Fed dependent and tapering QE will be a large obstacle for equity markets to face.