A Happy and VERY Prosperous New Year!
That's not a wish. It's my belief that 2014 is setting up to be one of the best years for the economy. The only real negative is that we've all gotten so used to six years of bad economic news that we aren't ready to recognize the good times when they arrive!
That message is not only coming from me -- but far more importantly, it's coming from the Fed, and from the latest economic statistics, and from the stock market!
A Quick Look Back
Just think back to a year ago, when the New Year found us on the edge of the "fiscal cliff," saved only by a last minute budget agreement to keep income tax rates from rising. (Yet, all workers did get a smaller paycheck as FICA returned to 7.65 percent in January, 2013.)
Then eight weeks later the "sequester" was upon us -- causing cuts in government spending and "furloughs" of government workers. Only the threat of Congress being delayed in its spring vacation by air traffic controller shortages got the government back on track. And despite lower government spending, the economy moved forward.
But that wasn't the end of our 2013 economic problems, as the debate over the Federal budget and debt ceiling led to a complete government shutdown for more than two weeks in October. We survived that, too.
Similarly, we got past the fears of Obamacare, not to mention the abysmal rollout -- all without destroying the economy. Plus, on the international scene during the year we glided past Euro nightmares, bank failures in Cyprus, and a credit crunch in China.
There was plenty of gloomy economic news throughout the year. Yet, despite all those economic issues, the stock market ended the year at record highs, with the Dow up 25 percent and the S&P 500 up nearly 30 percent.
And as we enter 2014, people are still worried about whether the stock market is "too high" -- and whether they should get out now. The past six years have conditioned us to such negative forecasts that our collective national psyche isn't ready to recognize that better times, far better times are upon us.
2014 -- What We Know
No one has a crystal ball, but we do know that trends in motion tend to stay in motion -- until they get carried to extremes and come to an abrupt halt. (That's a lesson learned in high school physics -- and re-learned by stock investors every cycle.) So, here are the trends in motion -- and none seems to be at an extreme, not even the stock market.
The Fed -- Last month, Fed Chairman Bernanke paved the way for incoming chairman Janet Yellen, by starting to slowly pull back on its money creation. They didn't start sucking credit out of the economy, just cut back on new money creation. Even the bond market, which last summer started worrying that Fed actions would lead to higher interest rates, took the December announcement in stride.
Interest Rates -- Yes, higher interest rates are coming -- but there's a long way to go before they create a slowdown. In fact, paradoxically, there are three reasons that moderately higher rates will help the economy.
First, higher rates will help savers who planned to live on their interest income. Second, higher rates will encourage lending -- as lenders see a chance to make money that offsets the risk of the loan. And third, as the public realizes rates are rising, they will stop postponing home purchases. More home sales means more retail activity -- all good for the economy. Still, if you're planning to take out a mortgage, better not wait too long.
Unemployment-- The job loss numbers continue to shrink, and more new jobs are being created. The statistics may not show a great improvement, as many of those who simply gave up on finding a job come back into the market and seek employment. But as jobs become available, spirits will rise. In fact, consumer confidence took a nice jump upward late 2013.
The Stock Market -- It's dangerous to predict the stock market. But the one thing that fuels the market is money -- and there's still plenty of that around. No one knows the best time to get in -- or out -- which is why you should have a regular program of investing for the long run, in your 40l(k) or IRA. And a rising stock market contributes to consumer optimism -- and a growing economy. So don't try to pick stocks. The market is always smarter than you are, and this past year certainly proved that!
One More Key Factor: This is an Election Year! The best news of all is that this is a Congressional election year -- and that should keep Congress -- both parties -- from doing stupid things to the economy!
The entire House of Representatives, and one-third of the Senate, will stand for election (or re-election) this Fall. That should bring a calming approach to the next debt ceiling impasse, which is likely to be postponed from mid-March to later in the year, and closer to the election.
Each of you gets one vote. Let's hope that Americans actually do vote -- and that they vote, on both sides, for elected officials who will work together to keep America growing.
Last year at this time, I said the economy "wanted" to grow -- despite the mess made in Washington. And it did grow, just not fast enough. This year, the economy has plenty of fuel -- money -- and fewer roadblocks, and a lot of pent up demand for everything from consumer goods to housing to cars.
Don't get caught waiting for the next disaster. Instead, approach 2014 with optimism. Do something different, invest in yourself and invest in the future. And encourage those who have given up on finding a job, paying down debt, keeping their home (or finding a new one), to give it all another try.
You all know my oft-expressed belief: No one ever got rich betting against America! And that's The Savage Truth.