14 Ideas for 2014
- We don't see a bubble forming in U.S. equities this year; valuation concerns appear misguided.
- The average investor, we believe, is under-invested in equities at a time when equities are likely to outperform bonds.
- Don't view the Fed's tapering move as tightening; interest rates remain low for the near term.
- While the risks in the eurozone have eased, it's unlikely we'll see strong equity performance in that region.
The start of a new year is often the time when financial advisors assist investors in reviewing their portfolio positioning, weigh allocation options. While the environment and the opportunities it presents continues to change, financial goals often do not. Retirement, education and other long-term goals still need to be funded.
That is why it is important for investors to review their portfolios with the assistance of an advisor, to ensure allocations remain aligned with goals. Active asset managers, who can adjust to macroeconomic developments and effectively analyze a variety of asset classes, are well positioned to help investors through a changing market environment.
So where are the financial markets headed in 2014? While no one can answer that with certainty, it helps to evaluate the landscape and understand the implications as we open a new calendar. Here are 14 ideas and perspectives that might be helpful as advisors and investors review their investment portfolios.
- After the strong run for domestic equities in 2013, some investors are concerned about rising stock valuations. We think that any major concern about valuations is misguided and do not see a bubble forming in U.S. equity prices.
- For several years, we’ve seen investors move assets out of stocks into bonds and cash. So far, about 10 to 15% of those assets have returned to stocks. We believe the average investor remains substantially under-invested in equities.
- We continue to see the U.S. economy being driven by energy, industrials and, to a lesser degree, housing. These are private-sector drivers that should be conducive to ongoing growth.
- Energy prices, especially gasoline, are moderating, putting more money in consumers’ pockets, which is supportive of confidence and spending.
- While the Fed has started tapering its bond-buying, tapering should not be viewed as tightening, or a step toward increasing short-term interest rates. Rather, it is a lessening of ease.
- So what would cause the Fed to tighten short-term rates? A stronger increase in the inflation rate. If job growth increases, then wage rates will very likely increase, contributing to higher inflation. Right now, wage increases are very modest and look to remain that way for quite some time.
- The combination of moderate economic growth, low inflation and slowly improving job growth in the U.S. creates a positive recipe for domestic equities.
- Long-term interest rates will normalize over time; a lot of normalization has already occurred.
- Over the next 12 to 18 months, if we have a 1.5% inflation rate and 2.5% GDP growth, the 10-year Treasury yield could rise to around 4%.
- A 4% level on the 10-year Treasury is not threatening to stock prices, but it does imply negative returns for bonds.
- The eurozone economy is likely to see very modest economic growth. While the risks there have eased, it is unlikely that we’ll see strong equity performance in that region.
- In China, government reform initiatives have the potential to be very positive for that country’s equity market, but they will take time to implement. China has a problem with wage inflation and some imbalance in what is driving the country’s economic growth. Therefore, government flexibility is somewhat constrained at the moment, but clearly China’s leaders have policy flexibility to achieve stronger growth than most other economies.
- Japan has undertaken aggressive policy initiatives to stimulate growth, and this year we’ll be watching to see how much traction is gained. We see positive signs and, while not conclusive yet, it appears Japan will be successful in its effort to increase economic output. It will take time to see significant results.
- Broadly, the U.S. appears to be on stronger economic footing as we enter 2014. While 2013 is a hard act to follow in terms of equity market performance, investors should see considerably stronger returns from domestic equities than through fixed-income securities over the next 12 to 18 months.
Past performance is no guarantee of future results. The opinions expressed in this article are those of Mr. Herrmann and are current through January 2014. Mr. Herrmann’s views are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. Waddell & Reed Financial, Inc. is the ultimate parent company of Ivy Funds Distributor, Inc.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available, a summary prospectus, containing this and other information for any of the Ivy Funds, call your financial advisor or visit www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.