What Lies Ahead? Here’s our outlook for what to expect now that we’ve wrapped up 2013 and are heading into 2014.
One for the Record Books:
Looking back to 1970, the return for the Dow Jones last year was the 5th best annual return. If we look at the top 10 on this list, in the year following the other nine top return years, we saw a return of 11.12%. The best return after such a great return year came in 1996 when the Dow was up 26.10% after previously recording a 33.45% return in 1995. The worst year following one of those top 10 returning years was -6.18% in 2000, after the Dow had run up 25.22% in 1999.
In the immediate future, we will likely continue to see flows coming out of bond funds. In the 4th quarter, we saw net outflows from bond mutual funds every week! Since the taper discussion was first brought up by Fed Chairman Ben Bernanke in May (31 weeks ago), we have seen outflows from bond mutual funds in 28 of those weeks.
Will Stocks “Earn” Their Keep?
A major question for equities this coming quarter is going to be if these companies can continue to grow their earnings… and at a quicker pace than before. Companies utilized cost cutting metrics to help keep earnings afloat as demand was weak, but now with economic growth expected in the 3% range, investors will demand to see bottom line growth tick up at a higher pace than we have been experiencing.
Will Markets Embrace or Reject the “Yell”
Helicopter Ben bids his farewell to the Fed in January and Janet Yellen will jump into the seat starting in February. All indicators point to Yellen being very accommodative and worried about disinflation, but this upcoming quarter she will have her first meeting as Fed Chairwoman. Depending on how she addresses the economy with her own words (not what people assume) could dictate the route of markets for the year, but likely for the quarter end.
A Longer Term Perspective
Let’s Party like it’s 1987!?!
In 2013, equity markets soared higher and dealt with minimal hurdles on their way to a 30+% returning year. But some indicators make it feel very similar to 1987 (without the Black Monday experience)! Excessive optimism, rising interest rates and dividend yields lower (because stock prices have risen) are eerily similar to 1987. This was a year that started off great and then had a pullback in equity prices, but still ended the year in the green. The pullback could provide opportunities for those that have continued to sit on the sidelines!
Fueling the Economic Growth Train?
Throughout the course of the year, markets (and companies) should begin to get more clarity (whether they like what they see or not). This will lead to more comfort in making decisions and ultimately spurring capital expenditures and hiring. This reaction should be at the roots of helping continue economic growth in the 3% range in the year ahead.
Propaganda Rather than Deadlock…
With the budget deal taken care of and ObamaCare in effect, along with a mid-term election in November, Congress will likely look to stay away from the headlines. The reason for this is simple: their image has been shattered in the recent past and they need to put on a good face for elections. Decisions such as continuing resolutions and debt ceiling increases should move through at ease as candidates try to position themselves on issues that shed a good light on them.
Less Politics, More Fundamentals…
With politicians out of the way, investors should be able to focus more on the fundamentals of the market as opposed to Wall Street Journal headlines. Valuations will allow investors to continue to be comfortable despite the enormity of the recent run up in stock prices. Current price to earnings levels are only slightly higher than average (currently at 17.34). Price to book valuations are slightly below the average of 2.84 times. While price to cash flow valuations seem to be the most out of line, they don’t scream anything near the shrieks heard in 2007.
The Final Word:
The longer term outlook continues to be that equity markets are in a longer term bull market and we will continue this bull throughout this year, despite the expected pullback. Income investments will continue to accomplish the goals they are supposed to accomplish… producing income. With the taper in effect, one major player from the marketplace will be exiting, thus causing rates to tick higher than but not as high as many pundits believe.
And as retirees continue to need income, the best option, in our opinion, to accomplish this will be to diversify amongst multiple asset classes (MLPs, royalty trusts, closed end funds, traditional bonds) rather than putting all the eggs in one basket or trying to chase the rising equity markets.
As we head into a New Year following such a great year in the equity markets, we must continue to understand the reasons as to why we are invested as we are. Income investors are looking for consistency in the stream of income (year-over-year), not necessarily the wild ride equities can produce. While growth investors are investing for the next 5, 10, 15 years, they will experience years like 2013 with huge gains, but along the way they will experience declines in value which impact them less because their need for the monies isn’t for many more years. And because of the recent success in the equity markets, it will be even more necessary for us, this year, to understand these goals and objectives and stay true to them despite headlines or market movements.
**The information provided within this report is intended for informational purposes only. None of the information discussed should be considered solely for individual recommendations or personal investment advice. Investment strategies that are discussed are relative to the current environment and do not pertain to individual investors portfolios or investment strategies. Every investor should review their own financial situation, financial goals and risk tolerance before implementing any investment strategy.