A release from the TABB Group claims Larry hit on 80% of his 2012 predictions and a staggering 89% of his 2013 predictions, which begs the question what does Larry see for 2014?
In the run-up to his prognostications Tabb points out that while 2014 will be a better year in general for markets, he does not expect the same performance by equities. “While 2013 will be remembered as one of the great equity investing years of all time – U.S. equity returns (S&P 500) breached 30%, IPOs returned, and active management began to wipe the tarnish off its brand – for most banks, brokers and exchanges, the outcome did not live up to the hype,” Tabb notes. “Quantitative Easing kept volatility and volumes low; and regulation, fines and insider trading scandals kept the industry tied in knots.”
He says the industry will see a little relief from the constant focus on new regulations and investors will be better positioned to take advantage of gains in equities, which he expects to be good though not as strong as in 2013.
On regulation, he expects the world to follow the CFTC’s lead and comply with most of its mandates though not without slight alterations and banks will get relief from some of the more onerous aspects of the new regulations.
Below are Tabb’s predictions for 2014 by category with a little editorial commentary from me.
1. Growth will continue its upward trend. Europe will move from +/- 0% growth to positive territory, averaging about 2% growth. While it won’t be anything fantastic, it will be a positive step. Meanwhile, Asia growth will get back on track as well.
DC: Agree, though nothing exciting about a return to mediocrity.
2. Fed QE will be reduced, which will cause and uptick in interest rates and volatility. But rates will not rise above 4%, and the non-abrupt pulling of the QE rug out from under the economy will allow for a fairly soft landing. As a result, there won’t be any major Western QE-related crashes/crises.
DC: Another rather tame prediction. A bigger deal should be made of what the Fed has managed to accomplish in the midst of political dysfunction.
3. The most aggressive prediction here is that Washington will settle down and not shut down. The government will begin to function more normally, and there will be an increased level of cooperation between Republicans and Democrats.
DC: Washington will act responsibly and politicians will meet the minimal requirements of their jobs! Now Larry is going out on a limb.
Market Structure: Equity market structure will remain quiet.
4. High-frequency trading, by and large, will fall completely off the horizontal media radar screen.
DC: Disagree. While HFT should diminish because it is mainly based on arbitrage and once inefficiencies are reduced to near zero there is no way to profit; once a boogey man always a boogey man and we will still need villains.
5. We still will not see major market structure regulation in either the US or Europe. Much of the transaction tax, order resting periods, and anti-HFT discussions will fade without major regulation or legislation; however, we will see discussions around queue priorities and order types that hide or slide in front of an active queue position (queue jumping). While equity market structure will be quiet, however, fixed income market structure will begin to move.
DC: We may still be going through regulatory withdrawal but with Bart Chilton gone can we still use the phrase “Cheetah traders?”
6. We won’t see a major threat to the fixed income status quo arrive.
DC: Woohoo! Treasury bull market forever.
7. However, there are a number of players that will be developing technology for release in late 2014 that will have a greater impact in 2015, at which time there will be one or two more serious challenges to the current phone-based trading modes. Meanwhile, SEF market structure will continue to be built out.
DC: A lot of regulatory roadblocks lead to innovative work-arounds.
8. The newer bespoke players will find it very difficult to be successful, as there will be a few high-profile SEF causalities in 2014.
DC: Markets will be market.
Regulation: Global regulation will begin to settle down. As mentioned above, many countries will model their regulatory environments after the CFTC’s vision.
9. While firms will continue to invest heavily in regulatory compliance, the pace of investment will decline and firms will begin to invest in opportunities.
DC: Perhaps firms will make the bet that regulators have no resources to watch them and put money elsewhere.
10. Banks will remain Public Enemy No. 1, and regulators will continue to mete out fines, as claims around the standards created through “fixes” such as Libor, FX, gold and other rate standardization mechanisms will continue to be picked over and used to beat the banks over the head.
DC: But will any bankers go to jail? It is hard for me to work up much sympathy for the major banks that were bailed out and then used their money to lobby for lighter regs. Without criminal prosecutions regulatory fines are nothing but teh price of doing business.
11. There will be a cycle rotation out of bonds and into stocks; however, it will be harder for banks to take advantage of this shift, as taking capital positions will be harder under both Basel and Volcker.
DC: Perhaps they can start making loans. You know banking.
12. The equity banking and origination business will remain strong. But as interest rates rise, the fixed income origination business will suffer.
DC: No more borrowing at zero and buying risk free Treasuries instead of lending?
13. U.S. Equity share volumes will increase for the first time since 2009.
DC: For that to happen investors must believe the markets are free to move without intervention. Are we there yet?
14. US Equity performance will be good, but not nearly as good as in 2013 (+30%). We will, however, see gains north of 10%. But while the U.S. will experience strong Equity performance, it will underperform compared with Europe and Asia.
DC: Well, you can’t maintain a weak economy supported by the Fed forever. However, if the market can have its greatest bull run during a massive recession and tepid recovery, perhpas it can falter with more positive economic conditions.
15. With the breakdown in correlations comes a cyclical movement away from passive funds toward active management.
DC: Is that what is behind recent attack on alternatives?
16. Private equity will come under greater scrutiny. Increasing regulation combined with higher-cost debt, as well as a robust equity market, will act as a double or triple whammy to make operating private equity harder, more expensive, and less profitable than it has been in the past five years.
DC: So they were the ones making money the past five years.
17. Fixed income volumes will increase, as there will be a cyclical movement from bonds to stocks. While this trade will not be as challenging or as difficult as we may have thought earlier in 2013 (as the QE taper has not been as traumatic as thought), it will occur, and equity inflows and fixed income outflows will be the dominant news.
DC: Yet equities will underperform 2013 results?
18. While there will continue to be pressure to create new electronic platforms, and at the end of the day we will see some competition to MarketAxess, the market will not migrate to an all-to-all limit order-style market.
DC: Someone will always be trying to build a better mousetrap.
LT: Overall, 2014 will be a better year for the industry than 2013.
DC: Based on industry statements, if we are still around it will be a better year.
LT: QE will taper, rates will rise, assets will rotate and commissions will be spent.
DC: A return to a more normal business cycle would be welcomed but I wonder if anyone can recognize “normal.”
LT: While market indices hit the moon in 2013 and we will not see that kind of reprise in 2014, there will be less anxiety in 2014.
DC: Beware: Most market experts say anxiety is what keeps markets humming along. It is when all the retail investors believe there is nothing but blue skies ahead that they get whacked!
LT: And the tradeoff of less anxiety for lower returns will be greatly appreciated throughout the industry.
DC: See above: You can’t take risk out of markets. As Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”
That maxim played out in 2013 and could play out in 2014 as well but with a different outcome.