Now is a good time to take stock in the current macro environment from a market perspective. Here’s what we think could happen at the end of this year and next year:
Stocks and Bonds
- It’s been a good year so far for equities. The S&P 500 is up around 24% and the NASDAQ is up 30% year to date through 11/5/13.
- High yield bonds represented by the BofA ML High Yield Master II, convertibles bonds represented by the BofA ML All U.S. Convertibles Index and preferred stocks represented by the BofA Adjustable Rate Preferred Securities Index have clearly outperformed investment grade bonds represented by the BofA ML Corporate Bond Master Index.
- High yield bonds are up about 6%. U.S. investment grade bonds, despite the Fed’s wanting to get rates back down, are still looking at roughly minus 1.6% returns .
- The current economic environment has clearly favored the equity markets and instruments linked to equities.
- I don’t see the Fed tapering at all this year. They’re not going to get enough data to make a judgment about that until earlier next year.
- The inflation numbers are very modest. They’re below the Fed’s target of 2%.
- Upcoming inflation data will likely be even lower given the fact that oil prices and gasoline prices are down more than they were even a few weeks ago.
- The economy is getting better and it’s likely that we’ll see better economic growth next year compared to this year.
- The U.S. consumer isn’t any worse off now than they were last year.
- Consumers just got a tax cut in the form of a gasoline price drop. Prices were approaching $4 a gallon during the summer and now we’re down around $3.25 to $3.30 a gallon. That’s good timing with the holiday season upon us.
- Auto sales continue to be strong and home sales have come down from their recent climb but are still going to be solid. People generally do not buy houses or cars if they’re feeling uncomfortable about their jobs.
- There are 2 million more Americans employed this year than last at this time and job growth has been modestly improving.
- We’re anticipating modest, globally synchronized growth in 2014.
- We think most regions of the world are going to grow next year, including Japan, which is clearly doing better, and we think will continue to improve in 2014.
- China’s economic data looks to have stabilized and even turned up a little bit.
- The euro region is also doing better but we don’t anticipate a lot of growth in that area of the world.
All data from Bloomberg as of 11/5/13.
Some of the headwinds that we’ve seen this year should ameliorate somewhat and the things that have been holding us back the most this year should improve next year. Again, we’re starting to see job growth on both the state and federal level despite the headlines out of Detroit, Puerto Rico and other areas around the U.S. The truth is, both state and local governments are collecting more revenue, and as employment increases, you’ll see both income and tax withholdings continue to climb.
The employment data shows the private and public sectors have been hiring and we think that will continue in 2014, though we’re still not sure how medium-sized companies will fare in the current market environment. Until that clears up, I think it’s still going to be marginally difficult to get people to spend more.
Overall, I think U.S. economic growth is going to probably be in the 2.5 to 3% range next year, which will be good enough to drive earnings a little higher than they were this year. We anticipate equities to do a slightly better than fixed income, not to say we can’t get 24% to 25% returns in 2014. However, I do believe we can get some earnings growth coupled with a little bit of price-earnings expansion. What I anticipate we’ll see over the next 12 to 18 months is continued evidence of a growing U.S. economy with the Fed continuing its modest approach to withdrawing quantitative easing. I think we’ll see positive global growth. Corporate revenues will continue to grow and we still expect a relatively easy monetary policy around the world from central banks. All this makes for an attractive environment for financial assets.