After a blockbuster 2013 for U.S. stocks, which gained more than 30% on the way to setting all-time highs, investors have numerous opportunities to consider, along with some unique challenges.
Here are the key things to know right now, according to a range of experts featured recently in Viewpoints:
- Stick with stocks as economic growth solidifies. Stocks may continue to outperform bonds and cash. Focus on companies with high earnings growth potential and reasonable valuations. If it is appropriate to your goals, investment objectives, and risk tolerance, consider financial, tech, and health care stocks.
- Brace for some volatility. Stay diversified. If you’re a long-term investor and it is in line with your investment objectives and goals, consider using pullbacks to buy strong companies at reasonable prices. If you’re a trader and are willing to assume the risk of investing in options, consider strategies like calendar and other spreads.
- Rates may inch higher, not spike. Bonds still play a role for income and diversification. The Fed could keep short rates low, and much of the change in longer rates may have already happened.
- Search for income beyond conventional bonds. If maximizing income is part of your investment objectives and you are willing to assume the risk, consider a mix of high yield, floating rate, convertibles, and equity income.
- Look abroad for opportunities. Europe’s economic cycle appears to be turning positive, and many foreign companies have lower valuations than their U.S. counterparts.
- Watch for a transition in emerging markets. Emerging market countries, such as Indonesia, Turkey, and South Africa, could suffer from U.S. central bank tapering. However, others—such as Mexico—may benefit from the next phase of growth.
Global growth solidifies
2014 economic and market outlook
Despite a diverse set of risks to the global marketplace, economic growth continued to recover from recession levels in 2013. Industrial economies, including the United States, showed remarkable resiliency last year, and both the U.S. and Europe appear poised for continued economic growth. Japan and China are also reaccelerating, though some of the fundamentals in these countries look more worrisome.
Stick with stocks for long-term growth
Stock prices are higher. But equities may still be attractive, compared with bonds and cash, as valuations remain reasonable, by historical measures. Many companies still have solid earnings growth. With lots of cash on corporate balance sheets, share buybacks and initial public offerings could support stocks. Likewise, a continued rotation out of cash and bonds and into stocks could make 2014 another positive year for equities, even if it doesn’t match the gangbuster performance of 2013.
In 2013, strength in housing, energy, and manufacturing propelled the U.S., and could sustain the market’s momentum in 2014. Within the equity markets, stocks with attractive earnings multiples and long-term growth prospects might outperform.
Brace for potential volatility
Risks remain, of course, and investors should be cognizant of the possibility for heightened volatility, particularly in the first half of the new year. The impetus could come from uncertainty surrounding the U.S. central bank’s attempts to potentially taper its historic bond-buying program and remove some of the stimulus it injected into the economy after the financial crisis.
Also, keep an eye out for a possible slowdown in China, tax hikes in Japan and France, key elections in emerging markets, and another unexpected market or geopolitical jolt. For long-term investors, this means staying diversified and rebalancing your portfolio as needed.
A view from abroad
After the run-up in U.S. equities, there may be relative bargains abroad—but you need to know where to shop. Europe’s improving economy could lead to increases in demand and improved profitability for cyclical industries. Emerging markets have slumped, though their valuations have become more attractive. Tapering could pose issues in many markets, but won’t necessarily mean negative performance for the year.
Countries prioritizing long-overdue structural reforms, such as Mexico, should benefit from the next phase of growth, while countries dependent on foreign capital, such as India, risk further downward pressure on their currencies as tapering commences.
The continued search for income
Income ideas for 2014
Investing for income
Many sectors of the debt markets struggled in 2013, as rising rates posed a challenge for bond prices. While much of the impact of Fed tapering may already be priced in, there could be more volatility and rates could continue to inch higher in 2014. Bonds still have a role in most portfolios as a diversifier and income source. But for capital gains potential and higher yields, it may be time to consider a multi–asset class approach that, if appropriate to your investment objectives and risk tolerance, includes high-yield, floating-rate, and non-bond income, including dividend-yielding stocks.
Investors worried about price losses may want to consider short-duration strategies and bond ladders. Investors with large cash positions for whom immediate liquidity is not a primary concern may want to think about inching out the yield curve with short- or limited-term fixed income investments, if their investment timeline and risk tolerance support doing so.
Sectors in focus
Areas of opportunity
Consumer discretionary and health care were the top-performing sectors in 2013. Which sectors might finish atop the leaderboard in 2014?
Our investment experts believe financials, technology, and health care may provide investors with some of the most attractive opportunities in the coming year. Specifically, alternative investment companies, mobile messaging, clouding computing, and specialty pharmaceutical stocks may be worth exploring.
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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. A floating-rate loan might not be fully collateralized, which may cause the floating-rate loan to decline significantly in value.
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