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January 14, 2014

Investment Considerations for 2014


By Richard Ascher

The Federal Reserve’s (Fed) actions in 2014 will be a key driver for the U.S. economy which will be less predictable with a new Fed Chair in Janet Yellen.  The Fed is unlikely to tighten aggressively, so rates at the short end of the yield curve should not change significantly.

U.S. economic growth is not expected to increase significantly in 2014.The budget deal has relieved some downward pressure on economic growth but there is still a debt ceiling debate to navigate in February.

In 2013, through the month of November, the U.S. had an average monthly gain of just 189,000 jobs in nonfarm employment and that slow pace is expected to continue.  The employment gains in this recovery have been the slowest on record for all postwar economic recoveries.

A major rise in U.S. bond yields is not expected next year, especially with low inflation and the Fed signaling its intention to keep rates low despite its tapering of quantitative-easing (QE) stimulus efforts.

After a year of 25 percent and greater gains in U.S. Stock Markets what can we expect? There has not been a correction since 2011, but any correction could be considered an opportunity. The forward price-to-earnings ratio is about 15 (which is not too high) and Fund managers are still not fully invested. Single-digit earnings growth could validate current prices.

Housing markets will depend greatly on regulations affecting mortgage lending standards. If standards tighten, that will probably have a bigger impact than an increase in mortgage rates. Rising house prices should bail out underwater loans, which will help this market. In addition, an increase in construction activity would support economic growth.

Growth in Europe has been sluggish and that is expected to continue.  Corporate earnings estimates in Europe do not reflect near term growth

Core fixed-income returns are expected to be low because of the Fed’s policy. The trend will be toward higher rates, given the QE taper announced at the December meeting and a possible increase in inflation expectations. Although there is an upside bias in mid to long term interest rates, they are not expected to increase significantly. Short term rates should remain extremely low.  High yield debt will provide relatively high returns but it will be based on coupons not capital gains.

China's economic growth is expected to slow in 2014 to less than 8 percent.  Although this is a significantly slower from the past decade, which averaged greater than 10 percent, it is considered favorable to reduce the chances of a "bubble" in their economy.

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