No one has a crystal ball, and both individual investors and professional investors face many of the same challenges.
Financial markets are extremely complex, and if investing was easy wouldn’t we all be sipping drinks on a tropical island (especially this week)?
That being said, all investors must proceed with a well-thought-out strategy built with some level of informed expectations for the future. So as I do every year, I will outline some of the trends I am watching in 2014, and in December we’ll look back and see how close to the mark I managed to get.
2013 was a spectacular year for the broad-based stock market indexes, and I believe 2014 will be a transition year. Historically the stock market experiences a correction (decline) of between 10 percent and 20 percent about every 20 months or so.
The last correction of just about 10 percent occurred from April to July 2012, so an event of this type is statistically about due. Now no one likes a market correction, but at this point I feel a correction of 10 percent to 15 percent would actually be a healthy necessary step in sustaining the current bull market and reaching the next level of new highs.
With the economic recovery gaining strength as reflected in recent 4 percent-plus economic growth numbers and now multiple months of strong employment growth, it is reasonable to ask what could prompt the market correction discussed above? My answer: interest rates.
The Federal Reserve already surprised many investors in December when it decided to taper its Quantitative Easing program, and I believe as the economy gains steam investors will begin anticipating additional reductions in this program.
The yield on the 10-year Treasury bond already is comfortably over 3 percent, and if yields continue to trend higher, I would expect the stock market to react negatively as investors are lured away from stocks by these higher yields. S
o barring any major economic or geopolitical disruption, which could reverse the trend in interest rates, I will be watching the bond market for my cues on the stock market in 2014.
In case I sound bearish, I’m not. I feel comfortable with stocks right now. I would however expect a rotation in the sectors leading the market. Energy, utilities and even metals and commodity stocks have underperformed, and I wouldn’t be surprised to see these sectors back in favor during 2014.
I haven’t always been committed to constant exposure to international markets, but after a brutal year for emerging market strategies I’m finding myself getting interested in rebuilding exposure to these markets, and just for a little fun I may explore a small position in an Africa-based strategy this year. I still find myself attracted to Japan and Europe, and I still don’t have a lot of faith in China.
Please remember, this talk is just for fun, and based in my opinion only. Every investor needs to do his or her own due diligence. I wish you all a prosperous new year.