According to Wikipedia, the idiom “chink in one’s armor“ refers to an area of vulnerability. It has traditionally been used to refer to a weak spot in a figurative suit of armor. Since the beginning of 2013, the market has been seen as invulnerable. Despite issues in the Eurozone, rising turmoil in the Mideast, riots and political clashes, rising oil prices and weak economic data – these issues bounced off the markets will little effect. The markets craved “bad news” as it provided insurance that the Federal Reserve would continue its “liquidity drip.”  By the end of last year, as the markets approached a 30% annualized return, I analyzed what 2014 might bring:
“I calculated the annual returns (capital appreciation only) using monthly data for the S&P 500. I then showed just the first year in which a 30% or greater increase in the S&P 500 occurred and the subsequent years following that 30% gain.”
Here are the statistics:
 – Number of years the market gained 30% or more: 10
 – Average return of 10 markets: 36%
 – Average return following a 30% year: 6.12%”
That analysis corresponds my discussion yesterday about the average return of the market during economic expansions with the Federal Reserve tightening monetary policy.
“If the current pace of reductions continues it is reasonable to assume that the Fed will terminate the current QE program by the October meeting. If we assume the current correlation remains intact, it projects an advance of the S&P 500 to roughly 2000 by the end of the year. This would imply an 8% advance for the market for the entirety of 2014.
Such an advance would correspond with an economy that is modestly expanding at a time where the Federal Reserve has begun tightening monetary policy.(Yes, Virginia, “tapering” is “tightening.)“
