Q: What’s Your Outlook For The Stock Market In 2014? - A: My Outlook Is Both Optimistic And Realistic.

Last year was very good for U.S. equity markets and, while capital preservation and growth require constant vigilance and healthy cautiousness, I am optimistic about opportunities in 2014 for a few key reasons. First, despite the conjecture about a possible stock market bubble, equities are not particularly expensive by many traditional measures. At year-end 2013, the S&P 500 Index was 1848 or 17.2 times projected 2013 earnings (also called the Price to Earnings or P/E ratio). In other words, you could buy $1 worth of S&P 500 earnings for $17.20. Historically, that dollar would have cost you, on average, $16.30 — not too far off from today’s levels. Comparatively, during the 1999 stock market bubble, you would have paid nearly $30 for that dollar! Record stock prices should not be confused with being expensive. Next, the global economy should continue to grow. The pace of American economic improvement picked up at the end of 2013 and is expected to continue. The outlook in Europe is also improving. Meanwhile, China has committed to sustainable growth while continuing to transition away from an export-driven economy, and Japan is taking radical steps to free itself from years of deflation and stagnation. And, despite the recent turmoil, emerging market economies should, to varying degrees, provide new markets for U.S. companies. All of these dynamics create opportunities for businesses to grow revenues and earnings power. Finally, regardless of macroeconomic factors, I estimate that the financially strong companies in which I invest can grow their economic worth. When excess capital is deployed wisely, these holdings can create shareholder value. I like to see them use this cash to grow operations organically, acquire other businesses, pay down debt, repurchase shares, or pay a dividend. It is my experience that these elements should have the greatest impact on wealth creation over the long haul because as businesses grow their earnings and economic worth, stock prices should eventually follow. Although I don’t make predictions, I must indicate that another year of tremendous stock market returns with no major pullbacks is not realistic. We know that, at some juncture, the stock market will fluctuate or even correct—it’s inevitable—but this does not worry me. When the market drops, I seek opportunities to purchase quality, bargain-priced stocks. While fluctuations can be unsettling, I encourage you to keep focused on your long-term financial goals. Trying to time the market just does not work over time. There is an overwhelming amount of research that shows that long-term investing—even through a stock market downturn—yields better results over the years than trying to time a decline, remove capital and return when “things are better.” My strategy is to continue to carefully study existing holdings, and their earnings power, while simultaneously considering opportunities to improve upon investment portfolios—price volatility should provide such opportunities. Overall, I am enthusiastic about the New Year. Fenimore Asset Management is an independent investment advisory firm located in Cobleskill, NY since 1974. Fenimore’s affiliates are the Fenimore Private Client Group & FAM Funds—offering separately managed accounts and mutual funds. In-depth research. Insightful investing.