Why Investors Should Be Wary Of 2014

After taking a glance back at the last 12 months, it’s clear that investors have a lot to be nervous about as we say good-bye to 2013 and hello to 2014.

The top scandals of 2013, including federal officials negotiating $13 billion in fines for JPMorgan Chase, the nation’s biggest bank, and Justice Department officials closing in on SAC Capital founder Steve Cohen, made investors as skittish as ever.

Against that backdrop, investors are clearly worried about being hoodwinked by Wall Street one more time, despite a roaring stock market. The dot.com crash of 2000 and the mortgage crisis of 2007 and 2008 have eroded the investing public’s faith in Wall Street.

Investors in the broad market should be cheering wildly, with the S&P 500 Stock Index up an astounding 29%, its best year since the late 1990s.

But those cheers are dying on the lips of many mom and pop investors this year as they remained wary of stocks, only stepping back into equities in an extremely cautious manner, according to an article in last week’s Wall Street Journal.

Investors are worried the current market is the biggest stock market bubble since 1996 dot com craze.

“Steep losses suffered during the financial crisis still weigh heavily on investment decisions by many mom-and-pop investors,” reported the Journal’s Alexandra Scaggs.

As regular readers of this blog know, Wall Street caused plenty of pain for investors in 2013, particularly those in supposedly “safe” municipal bond funds.

The collapse of the $70 billion municipal bond market in Puerto Rico over the summer has created a world of pain for those bond holders, many of whom own the bonds in closed end funds created by UBS or steady, stable mutual funds created by Oppenheimer and other fund companies.

Indeed, muni bonds, pitched by brokers as a safe haven for clients, ended the year on track to having their worst year in almost 20 years, according to Mike Cherney in last week’s Journal.

“Municipal debt is down 2.58% so far this year after handing investors a 6.78% return in 2012 and a 10.70% return in 2011, according to Barclays’s municipal-bond index,” Cherney reported. “’We’ve had these high-profile credit problems that have caught the attention of investors,’” one portfolio manager told Cherney.

And municipal bond investors potentially face another bad year in 2014, as a downgrade to “junk” status looms for the island commonwealth of Puerto Rico. Investors also remain concerned about Chicago and Illinois pension costs. Detroit’s default in the summer was the largest municipal bankruptcy in U.S. history.

No doubt the troubles of this year will be amplified and repeated next year. Watch for more municipal bond defaults and downgrades, as well as the Feds taking on the formerly perceived impervious financial institutions and hedge fund kings that used to dominate the business news.

Rising interest rates will erode the value of long-term investors’ bond holdings, so brokers will be hawking dividend-starved retirees high yielding products like nontraded real estate investment trusts and business development companies, which also come with high fees for the brokers.

Indeed, next year could wind up looking a lot like 2013.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.