Outlook 2014: Are we in the eye of the storm?
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
John Manley, CFA, Chief Equity Strategist
James Kochan, Chief Fixed-Income Strategist
- Except for China and some other emerging economies, we think the world will see accelerating growth in 2014.
- Abrupt adjustments in exchange rates could cause political instability in a few emerging markets countries. Although this could renew rumors of currency crises or debt crises, we don’t think the situation will reach crisis proportions.
- Positive political reforms in emerging markets point to investment opportunities, particularly in Mexico and India.
- While the midterm elections in the U.S. are likely to be important, the balance of power won’t shift significantly, even if the Republicans retain control of the House (which is likely) and take the Senate (which is possible, but not highly likely).
- Monetary policy will continue to be a plus for markets in the U.S., Europe, and Japan.
- Profit margins are currently high, and we see that trend continuing. It should be a good year to take on some more risk.
- We believe that most, if not all, of the factors that were in place to drive the market higher a year ago are still in place and, in our opinion, should remain so over the course of the next 12 months.
- Numerous pundits have commented on the risk created by the market rise this year, and this interpretation has been accepted by investors. Investors themselves have questioned whether they have missed the big run and can only expect the reflexive decline. However, the historical record does not support these viewpoints.
- In our view, the Federal Reserve (Fed) will eliminate quantitative easing (QE) only if, and to the degree that, the economy no longer needs it. We believe that Fed policy will keep interest rates low long after the taper is finished and that, with little evidence of inflation or wage pressure on the horizon, we expect the policy will remain a positive for equities throughout the course of 2014.
- We believe that the world is slowly returning to normal five years after the massive disruptions of 2008 and are recommending that investors overweight the sectors that stand to benefit from such an expansion.
- As confidence in the existence of the recovery in Europe begins to be felt, we believe that valuations can normalize and its markets can outperform the U.S. in the process. The emerging markets are also promising.
- Our advice to fixed-income investors for 2014 remains the same as it was a year ago: Income, not safety, should remain the primary investment objective in the year ahead.
- The consensus forecast from members of the Federal Open Market Committee (FOMC) is that when the target for the federal funds rate moves off zero, the rise should be gradual. Even as short-term rates rise, the compounding of that interest income, together with flattening of yield curves, would, in our view, produce better returns from notes and bonds than the most dire commentaries are now predicting.
- It would be difficult to overemphasize the attractiveness of municipals today. By virtually any metric, the municipal market is exceptionally cheap relative to the taxable markets. And because quality spreads are unusually wide, the best values within the municipal market are the A/BBB/BB credits. Capturing those values requires the support of good credit research and experienced, professional portfolio managers.
- For investors with an investment horizon of three years or longer, we recommend a strategic overweight to equities relative to fixed income.
- Short-term, over the next three months, we think investors may still be rewarded by looking at higher-yielding fixed-income investments as well as equities, whether growth or value.
- Global equities still look attractive from a valuation perspective. There are risks, as the economic recovery is still middling at best. But pessimism is already priced into stocks, especially European and emerging markets equities.
- Based on our economic outlook, we believe interest rates are likely to remain low for 2014 and 2015. This presents an opportunity for investors to take on additional duration and credit risk, but we prefer more credit risk to more duration risk.
The views expressed are as of 12-17-13 and are those of Chief Portfolio Strategist Brian Jacobsen; Chief Equity Strategist John Manley; Chief Fixed-Income Strategist James Kochan; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the authors and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.