As we replace our 2013 desk calendars and Day-Timers with their 2014 versions, there will certainly be a robust dialogue as to what will shape the year ahead for garnering the best investment returns, especially following a banner year like that of 2013. The landscape has been recently defined by the initiation of Fed tapering that is predicated on improving trends in labor, housing, consumer spending and industrial production.
The second quarter of reports showing steady improvement is the evidence that warranted the Fed’s move to reduce its fiscal stimulus. At the same time, Fed policy states that further reductions to the now $75 billion per month in asset purchases will continue to be data-dependent, a position strongly held by incoming Fed Chair Janet Yellen. Investors truly were gifted a Santa Claus bell-ringer of a rally upon the release of the Dec. 18 FOMC decision, and the S&P 500 will finish the year about 29% higher as a result.
The bond market also believes this to be a lasting program in that yields have edged higher. However, by historical standards, yields are quite attractive for capital formation, business investment and consumer and commercial lending.
With the 10-Year Treasury note holding below 3.00%, the threat of runaway interest rates due to Fed tapering has been greatly diminished. Those savers seeking higher yields from money markets, CDs, government agencies, treasuries and other conventional fixed-income vehicles will continue to be frustrated by paltry low single-digit returns that barely, if at all, keep up with inflation and taxes.
To that end, I predict 2014 will be another very bullish year for investors with a select list of high-yield assets that target economic growth, gradual inflation, incrementally higher interest rates, stable to higher energy prices, higher taxes and a rising equity market.
I can’t emphasize enough that trying to pick a bottom in the recent bond selloff is way too premature. My firmly held view for the first quarter of 2014 is that the tide for high-yield assets that are tied to the bond market is still vulnerable to further price erosion.
At the point in time when the yield on the 10-Year Treasury note reaches 3.5%, I would be willing to consider stepping back into fixed corporate and preferred debt, fixed-rate mortgage REITs and other high-yield bond-equivalents — but not now.
There will be plenty of time to react if evidence arises that the current strengthening of the economy stalls due to a slowdown in home buying activity, consumer spending, employer hiring or the unknown real financial cost of Obamacare that impacts 20% of the economy.
In general, though, I expect that another 10%-15% rise in the S&P 500 next year is a reasonable target.