Wouldn't it be great to predict where the market is going to go in 2014? Well, it's a question that every investor wants the answer to. Last year in January I predicted a huge bull market, and that's what happened this year with the stock market up over 24% YTD. And in an attempt to gain clarity on the current state of the stock market going into 2014, we reached out to some of the best traders and investors in the world.
These are the individuals that you see on CNBC. These are the traders that are making a living from their investments. And while they wouldn't give up all of their secrets, most shared enough insights that we could get an interesting picture of what to expect this year.
Overall, they said the following:
- As a whole, most were bullish on 2014:
- There were only two major concerns that every investor shared: a correction is looming and the Fed taper will cause a slowdown in 2014. It was almost split between the two scenarios:
- When it came to what sectors and markets would perform best in 2014, it was a mixed bag, with International Equities and Emerging Markets being the most mentioned:
- As for the sectors to avoid, it was pretty clear on two areas: US Equities and Government Bonds:
Here's what each of them had to say individually:
- Ivan Hoff
- Bill Stromberg
- Charles E. Kirk
- Barry Ritholtz
- Frank Zorrilla
- Brian Shannon
- David G. Barnes
- Mebane Faber
- Bard Malovany
- Justice “Jack Sparrow” Little
- Michael Gauthier
- Larry Ludwig
- Trader Stewie
- Marc Chandler
- Dividend Growth Investor
- Kathryn Cicoletti
Aggressive central bank stimulus has helped developed market economies recover from the global financial crisis of 2007-2009. Many investors moved away from equities and into bonds during that time, but long-term equity investors fared the best during the downturn and recovery. Risk/reward is now more balanced and investors should be more risk-aware. Confidence has been restored, but it is important to be vigilant as the U.S. bull market is aging. International investments, especially in emerging markets, represent the best long-term value from here in fixed income and equity.
Charles E. Kirk
My strategy is the exact same as last year, which is to follow and trade the price action and the technical patterns that develop from it above all else. This includes what I personally think is going to happen, what I want to happen, and what I'm afraid of what will happen in 2014. Doing this consistently, especially in recent years, as the volume of noise explodes in the market, has been the best approach and I expect that to continue not only next year but for many years to come.
Frank Zorrilla is the founder and chief investment officer of Zor Capital LLC. He began his Wall Street career 10 days after his 20th birthday and currently blogs at ZorTrades. You can follow him on Twitter @ZorTrades.
My strategy for 2014 is the same as every year; the goal is to outperform the market with very little low volatility regardless of what the market is doing. As far as sectors are concerned, I usually take a look at the worst performing sector of the previous year for opportunities on the long side, if they arise. I don't go into to the year with S&P 500 targets or with what is going to be the go to sector etc…I see what is happening and I adapt.
My strategy is no different than it was for 2013, 2012 or any other year. I am a trend trader and all of my market decisions are based on price action. In 2014, I will continue to listen to the market, not news for my trades. I think that 2013 should have been a great lesson for traders and investors to realize that it is price action that matters, not the news.
Have a plan which is based on objective analysis and manage risk, that is the simple formula for success. I dont like to make predictions, my best advice is when you see predictions, take them at face value and use them as a starting point to do your own research and “make the trade your own”. Whatever your style is, I hope 2014 is a great year for you!
David G. Barnes
David G. Barnes is the President and CEO of Heber Fuger Wendin, Inc., an investment advisory firm established in 1934 that has $4.6 billion in assets under management.
My best guess for the U.S. economy in 2014 is a continued slow economic recovery, rising interest rates, a very gradual increase in inflation (maybe up to 2%), the start or continuation of bond purchase tapering by the Federal Reserve, and eventual end of the quantitative easing (the government's bond buying program), more promises from the Fed to keep short term interest rates low for a long time (a/k/a “forward guidance”), and talk in Washington of eliminating the tax exemption for municipal bonds.
The stock and bond markets will continue to bounce around, so my general advice for most investors with a 401(k) or IRA is to avoid trying to time the market. Instead, try dollar cost averaging – invest a fixed amount on a regular basis in low cost index funds. This way you automatically buy more shares with your fixed amount when the market dips and fewer shares when the market spikes. And avoid the temptation of watching the daily market gyrations on TV. In other words, set it and forget it.
On a global basis, stocks are cheap. Unfortunately, that isn't the case at home here in the United States. Out of 44 developed and emerging countries we track, the US is the most expensive on a long term P/E ratio basis (Shiller 10 Year PE, or CAPE). Now, that doesn't mean stocks will crash, or even go down. What it does mean is returns will be muted over the next 5-10 years, and there are better opportunities abroad.
Considering the US is nearly half of world market capitalization, investors should look to invest at least half of their assets abroad. An 60-80% foreign stock exposure for the equity allocation is not unrealistic.
Lastly, within the US, be wary of high dividend yielding companies and small cap stocks, both of which are very expensive relative to historical levels. A much better approach is to be size agnostic, and to look at all of the cash flows, what we call shareholder yield. And lastly, use a valuation screen to make sure you're not buying what is expensive!
It's looking like 2014 will be shaped by coordinated economic expansion across most of the major economic players (US, Europe, Japan, China, etc). We haven't seen a backdrop like this in the past several years, so it could support investor sentiment and risk taking as we enter the New Year.
That said, risk assets are no longer cheap and sentiment is overly bullish, so investment gains will need to be driven primarily by growth in fundamentals rather than multiple expansion. Fiscal policy in the US will be key to watch, as the private sector seems to be taking its cue, at least to a certain extent, from whether or not there are major policy uncertainties waiting around the next corner. There is a lot of pent up private sector investment that is currently being held back by this uncertainty.
Our firm's policy is to maintain broad diversification in client portfolios while making small adjustments on the margins of our allocation strategy in response to the changing landscape. Thus, we will continue to hold equities at or above long-term targets while having a sell discipline in place to avoid participating in an unexpected market crash. We will be underweight bonds in light of low yields and potentially rising rates, and will use that excess capital to overweight absolute return-oriented managers and strategies. We will maintain a core position in gold, but will be underweight our long-term targets in broader commodities in light of macro fundamentals. Meanwhile, we will emphasize alternative sources of income such as real estate and private lending and will be working hard to identify non-traditional opportunities for our clients to enhance their core holdings in traditional assets.
Bard Malovany is a financial advisor who writes at Advice to Wealth, and he is also a registered representative of Lincoln Financial Advisors Corp., a broker dealer.
I don't have precise prognostications for 2014, but I do have some longer-term thoughts about the financial markets.
Specifically, stocks of large domestic companies, by most valuation metrics that have historically been predictive, are expensive. Small company stocks are even more so. International equities, on the other hand (both developed and emerging economies) seem underpriced based on most metrics. Similarly bonds across the spectrum are expensive.
While that doesn't have too much predictive value in the near term, I does suggest lower than historic returns from domestic returns and relatively stronger returns from int'l markets.
Justice “Jack Sparrow” Little
We are “go anywhere” traders and “big game hunters,” which means two things. First, that we can trade any liquid asset class and will migrate to wherever the most opportunity resides; and second, that we focus on major trends and monster gains, as opposed to messing around with scalping or trying to grab a few ticks.
For 2014 we see two major themes: The end of stock market levitation and the return of the US dollar. For the past few years markets have risen on the “magic pixie dust” of Quantitative Easing (QE). The impacts of QE have been more psychological than anything. The actual QE process is not money printing or anything of the kind — it is merely an inert asset swap. With that said, the Federal Reserve's willingness to “push investors out on the risk curve” by perpetuating near-zero interest rates has caused inflation to show up in risk assets, if not anywhere else, and fueled a strong complacency trend. In 2014 the multi-year period of Fed-enabled, levitating markets will end, creating some excellent shorting opportunities. When Bernanke steps down in Jan 2014 it will be the end of an era… and the beginning of a new paradigm. Bears never die, they only hibernate — and the bear will return in 2014.
Second, the US dollar is going to go on a rampage in 2014. Those who anticipate the “death of the dollar' fundamentally underestimate the strength of the US economy and the value of American assets, while misunderstanding macro forces in general. In terms of recoverable oil and gas reserves and real estate alone, the US government is sitting on more than $200 trillion worth of assets. This says nothing of private assets (hundreds of trillions more) that the Uncle Sam has the power to tax, or the more than $70 trillion in household net worth. Compared to all this, the US' roughly $17.3 trillion in national debt is the equivalent of a mid-sized car payment. The US economy is strong and getting stronger, as both David Rosenberg and BAML analyst David Woo have recently highlighted.
As a result, in 2014, growth differentials will come home to roost and result in a serious secular uptrend for the greenback. Our largest exposures are in dollar-bullish forex positions: Long dollar/yen, short Aussie dollar, short Canadian dollar. We will add short euros at some point in 2014 as well. Dollar-bullish positions will make an absolute killing in the coming year as a combination of “risk off,” plus rising US interest rates on Fed stimulus withdrawal, results in a repatriation of investment dollars from Europe (where deflation troubles lurk) and further malaise in emerging market equities. We anticipate making a lot of money on the bear side of equities in 2014, but even more in forex, which will break out of the box with true monster trends for the first time in years. 2014 is going to be horrible for investors caught flat-footed, but awesome for traders with the vision and the guts to exploit these trends.
We still like US Equities. The energy revolution is here and still one of the favored sectors. Most of the institutions are using MLP’s as a way to gain access to this area for great yield. We use the Alerian MLP (AMLP). We believe that US Equities are no longer undervalued but now fairly valued. We have not seen any major correction and a 10% correction could be coming. We would use this opportunity to be a buyer if that happens.
Another major area of focus was international developed countries. Europe is looking quite attractive and we see that the international developed is trading at about a 20% discount. We would recommend to be adding to this allocation. We utilize some of the ETF’s and pair them with some active managers for this (VXUS, TRWAX, CAGAX). Overall we still are overweight Equities with an increasing allocation to international and underweight fixed income. Reducing as much government bond exposure as possible.
Larry Ludwig is the creator of Investor Junkie, where he focuses on how to leverage your investments to make more money.
My strategy for 2014 is no different than what I used in 2013: focus on SHORT TERM bursts in momentum, focusing purely on the underlying trend that is going up. Going into 2014, I am bullish, but I think at some point, we are going to see a big pullback of at least 10-15%, which will likely create a great buying opportunity. However, it will probably be very scary and very hard to buy into it initially, so surviving that pullback will be crucial.
Marc Chandler is the Head of Global Currency Strategy for Brown Brothers Harriman, and also blogs at Marc to Market.
The broad characteristics of the U.S. investment climate are unlikely to change very much in the first part of next year. The largest policy change is the beginning of the long awaited slowing of the Federal Reserve’s long-term asset purchases. The process will likely be gradual and may take the better part of 2014 to come to a complete stop. The drag from fiscal policy will likely lessen. The roughly 1.7% annual growth in employment since 2009 is set to continue and underpin a continued expansion of the world’s largest economy.
Investors have come around to the Federal Reserve’s admonishments that tapering is not tightening. Unlike in Operation Twist, under which the Fed sold short-term Treasury securities and bought long-mterm, the current guidance is that the Fed does not want to see short-term rates rise. It is more willing to accept curve steepening. The $10 billion of tapering, divided equally between Treasuries and mortgage-backed securities, announced December 18, speaks to the Federal Reserve’s gradualism. The forward guidance suggests a rate hike is highly unlikely in 2014. Although the probable expiration of emergency jobless benefits at the start of the year will likely push the unemployment rate down through a further reduction in the participation rate, the Federal Reserve has signaled that the unemployment rate is likely to fall below the 6.5% threshold it has identified.
We had expected the tapering move and greater forward guidance to be delivered by the new Federal Reserve chair. We had argued that the Fed’s forward guidance would be more credible if the chairman that will implement it, issued it. Due in part to our concern that after an inventory-fueled 3.6% SAAR Q3 GDP, the US economy is going to slow back to what now seems to be its growth trend of around 2.25%-2.50%. In addition, we are concerned about downside risks to the core PCE deflator in the coming months. Finally, with Republicans seeking more spending cuts in exchange for lifting the debt ceiling, which President Obama refuses to negotiate, another fiscal impasse cannot be ruled out.
The Chinese economy may slow modestly in the coming quarters, though officials will likely respond to evidence that growth is falling below 7.0%. The focus has shifted toward the implementation of reforms announced by the Third Plenum. These entail financial and governing reforms. The special economic zone in Shanghai will be viewed as a test case of the ability of the reformers to implement their program over the obstacles posed by inertia, corruption, and outright opposition.
The first year of Abenomics has seen growth strengthen, deflation pressures ease, the yen weaken and Japanese equities advance smartly. The early turbulence of Japanese government bonds has eased and nominal yields remain low (real rates negative). The second year is bound to be more challenging, as the economy has lost momentum in the second half of 2013. There may be some increased consumption ahead of the April 1 hike in the retail sales tax from 5% to 8%, but this is likely to be borrowed from subsequent quarters. This may not occur until closer to the middle of the year, when the Bank of Japan decides to provide more financial support for the expansion in addition to extra insurance around its 2% inflation goal (excluding fresh food and the retail sales tax).
Japanese bond yields, on the other hand, may rise in 2014, but not because the BOJ stops its buying program. Rather the low rates of return will push institutional investors, including the Government Pension Investment Fund, into equities. New government-sponsored investment schemes are designed to encourage equity investment, though given the risk-averse nature of Japanese households, relatively high dividend stocks will likely be preferred. We see scope for around a 5-7% depreciation of the yen as the dollar moves into a new trading range against it, while the dollar stays range-bound against the euro. Later in the year, we expect the dollar-yen pair to find a new trading range as the dollar trends higher against the euro.
Dividend Growth Investor
Dividend Growth Investor focuses on investing in stocks with above average dividend growth. You can find him at Dividend Growth Investor.
I am finding value in following companies which have strong recognizable brands, sell at fair valuations, and could increase earnings over the next 15 – 20 years. I believe that each one of these companies would be a very good addition to a diversified dividend producing portfolio. I'm looking at these companies as great long term holdings to hold “forever”. They are selling at good prices to acquire today, and are good candidates for holding in 2014 and for a long time after that.
I have no clue what is going to happen to the US or Global economy, or the stock market. So let’s start with this, one of the biggest misconceptions people have is they think economic growth in the US is an indicator of how the US stock market will perform.
For that reason, I own zero bond funds. US government bond funds are overvalued and I don’t have an interest investment grade corporate bond funds either (corporate bonds are just loans that big companies issue. You loan them money just like you’d loan the government money, and you’d collect interest from them in return.)
Stock funds are a mixed bag. A US stock index fund is expensive relative to an international (ex-US) stock index fund. But while US stock funds are more expensive than International stock index funds, they aren’t hugely overvalued when you compare them to the late 90s. When I say expensive I mean when you look at the P/E ratio (not the cost, or annul management fee). So yes, everyone is talking about “a bubble” and we all understand why: the US stock market could be trading higher than what underlying fundamentals support (like how fast or slow the economy is growing), but it doesn’t mean that there isn’t more room on the upside before things head back down.
My investments are allocated across four Vanguard funds. They’re all stock funds, with a core holding in an international stock fund. I will reduce some of my stock fund exposure and move into a bond fund once the interest rate I’m paid to own bonds (or loan money to the government or corporation) becomes attractive. In 2014 I’m paying close attention to what the Fed does. There is no way I can time the market, but, there are certain numbers you can pay attention that help you make informed decisions on your asset allocation.