Grinding Forward in 2014 

 

Happy New Year! As we get started in 2014 we thought it might be helpful to outline our 2014 market outlook. At present, we have a general view that returns for stocks in 2014 could be described as a “forward grind”. This is fundamentally different than our view at the start of 2013, where we presented “Factors for Prosperity for 2013."

 

What does “grinding forward” look like? It means that our economy (and the global economy) continue to strengthen at a slow rate, but stocks move both upand down with the net returns being somewhat higher for the year.

 

Unlike 2013, stock prices are not starting the year off at low levels. In addition, the Federal Reserve is preparing to back off of their easy money policies. We anticipate that 2014 will be described as a tug of war for stocks - positively impacted from improving economic growth and hindered by rising interest rates and central bank tightening of monetary policy.

 

In the bond market, things continue to look pretty bleak. In 2013, interest rates rose noticeably and most bond funds lost value, as expected. The problem is that current rates remain too low given the reality of the global economic recovery. As the Fed tapers the bond market off quantitative easing (life support), we expect bond prices to drop back toward long-term averages and interest rates to rise further. In 2014 we will limit our use of bonds to avoid obvious interest rate risks.

 

One positive for stocks resulting from the “bubble” in the bond market is that much of the new investment dollars coming into the investment universe are likely to flow into stocks rather than bonds. This could produce unexpected higher returns for stocks, but certainly not without turbulence.

 

Given these factors, our overall view of what 2014 may bring (absent any significant geo-political events or natural disasters) is a modest positive (but volatile) year for stocks and another poor year for bonds.

 

Similar to our stance in 2013, we believe that owning more risk assets (stocks, high yield bonds, certain alternatives, etc.) in portfolios will compensate investors for taking more risk in 2014. If you have not had a recent conversation with your advisor regarding the appropriate risk for your account(s), this would be a great time to do so. We will continue to remain diversified and nimble, seeking to take advantage of any market dislocations or selloffs. We will also keep you posted on our portfolio adjustments along the way.

 

Best wishes for a happy and healthy new year!

 

Bottom Line: A growing economy should set the stage for a good year. However as stock prices get higher, we expect normal turbulence. We are prepared to navigate as necessary.