2013 was certainly an eventful year both politically and economically and I think 2014 will prove to be just as interesting. The biggest concern I see over the next year is the amount of civil unrest that is building. For some reason governments think corruption and higher taxes will go unnoticed… In 2013, we saw protests in Argentina, Brazil, Indonesia, Malaysia, Thailand, Turkey, Tunisia, Ukraine and just about all of Europe (just to name a few). These events can cause serious disruptions in capital flows and lead to a lot of volatility. These are the risks to be avoided.
Despite all that, I’m still very positive on many asset classes and areas of the global economy. Here’s a quick overview:
US Stocks – Strong years are usually followed by further strength. This much momentum takes a long time to top out so worst case we should see 6 or 9 months of sideways churn. Best case, the trend higher continues and we see an additional 20% to 25% gain. The macro story of low interest rates driving money into stocks hasn’t changed so I am expecting another positive year in 2014. I’m not necessarily concerned with where the overall market is going though, since I’m always looking for individual stocks which I feel are poised to perform well regardless of the market’s direction.
US Bonds – Ugh… the 10-year Treasury bond finished the year right around 3% after climbing another 0.50% in the last 2 months. High quality bonds really can’t be relied on as a decent source of income at this point and things get even tougher with bond funds because you add the interest rate risk. They should be used as a source of stability and liquidity, which can be tough to stomach when stocks are booming because you feel like you’re missing out on money you could be making, but keep in mind that stocks don’t go up forever. Everyone should assess their own financial situation to know how much of their portfolio should be held in reserves (bonds) but keep your performance expectations in check.
International Stocks/Bonds – Unfortunately these areas have become very dislocated and cannot be discussed as a whole (somewhat for the risks mentioned above). I’ve had to dig very deep into specific countries to find favorable investments from a reward/risk standpoint. The biggest risk as a US investor will be currency changes and I have a positive view of the US dollar against most currencies which means pressure on international assets.
Commodities – I think there’s a very good chance we see gold bottom at some point in 2014. I’m still looking for that final flush lower with exhaustion selling before buying again. To me, energy looks to be range bound. The amount of oil/gas that the US is producing should keep a cap on energy prices. I doubt oil will break out of either end of the $80 – $110/barrel range. It looks like the major ags (corn, wheat, soy, etc.) will also remain capped. However, a lot of the commodity related stocks saw some strength the past few weeks which could be a precursor to higher prices in 2014; or simply some sector rotation because they underperformed other stock sectors in 2013; or, most likely a combination of both. Either way, I think the worst is behind us and many of these commodities/companies offer very attractive long-term value.
Real Estate – I think the best opportunities still remain in the high-end and commercial areas. To sum it up: rates are still very low and we live in a world where the rich will continue to get richer and the governments will continue to raise taxes on them. As a means of storing wealth and deferring taxation, rich people buy real estate.
—
For anyone doing a year-end assessment and looking to reallocate their 401(k) plan for the year ahead, do yourself a favor and don’t just buy whatever fund did the best in 2013. It very well could perform well again in 2014 but do some research or talk to a professional for some guidance.
I’m looking forward to another interesting year ahead. Happy New Year to all!
Nick