What Will 2014 Bring for The Equity Markets?

As the year draws to a close, investors are searching for clues as to what may be in store for the economy and markets in 2014. What have we learned from the markets in the month of November? Honestly, not very much. The scenario has not changed much in the last 30 days.

As my colleague Sam Wardwell has chronicled in his weekly market reports here on followfPioneer, the U.S. has seen steady, slow growth and improvement in some leading indicators, such as the PMI Manufacturing Index for November, which came in above consensus at 54.7, a 10-month high.

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Are We in an Equity Market Bubble?

In the last few weeks we have heard a lot of noise from different newspapers and television programs saying that we are in a big equity bubble. Honestly, I don’t see it. It’s been almost two years since we’ve had any meaningful correction, and we can’t rule out the possibility of one in the future. However, I don’t think we are in a bubble.

The market is trading at roughly 17-17.5x 2013 earnings. It seems to me that the multiples are within the historical ranges, despite a world with no inflation and historically low interest rates. I don’t think this market is cheap, but to call it expensive is really a stretch. In 2000, our last equity bubble, the market was trading at 60x trailing earnings.

Investors Should Keep Focusing on Equities 

Large-cap stocks are especially attractive. Mid-cap and small-cap are a little bit more expensive – in some cases quite a bit more. However, that has been the case for the last few years. So not only do I see a lack of valuation bubble in the market, I still think that, with very little wage growth, we may see multiples continue to expand if GDP is growing at 2.5 – 3%.

I believe 2014 will be another year in which investors should consider increasing their equity exposure. I think any correction will be a good opportunity to invest in this market, where many investors have missed out. Usually, when we see a big bubble, it’s because valuations are very stretched and everybody’s in the market.

So I think that those pundits who are calling this market a bubble are really missing the big picture here. And I think investors should keep focusing on equities because they will continue to deliver better results than fixed income.

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So, How’s Our Recovery Going?

Over the last 2 1/2 months the markets have been very interesting, to say the least. We’ve seen the beginning of what most people believe is the transition between portfolio flows from only fixed income to a more balanced approach that includes equities and multi-assets. All of a sudden fixed income, which was once perceived to be a less risky asset class, produced some negative returns and heightened volatility. In fact, there has been more volatility in the fixed income market some days than in the equity markets. So clearly, this once-perceived “safe haven” is starting to show some cracks.

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