The year 2013 turned out to be an interesting year. Not only did the U.S. stock market lead the way over the vast majority of developed economy markets -- with the notable exception of Japan where stocks rose over 50 percent -- it did so in the first year of a Presidential election cycle. The first year of a President's term is, on average, the worst for the market over the years.
So an approximate 30 percent gain for the S&P 500 was the last thing anyone was predicting as 2013 began. Of course, that's a trend we've seen before, with the market confounding the strategists who make predictions about the coming year. Trust me: Predicting financial markets is hazardous duty.
So what can we expect in 2014? Don't think I'm crazy enough to put my neck on the line with specific predictions, but if we
step back and look at the big picture, we may find some clues if not a specific forecast.
Stocks Compelling Compared to Bonds - Despite the recent rise in long-term interest rates from record lows as the economy continues to gain strength, interest rates are still at very low levels. This makes the dividend yield and appreciation potential of stocks favorable compared to government bonds at the present time.
Also, with an accommodative Fed keeping short term rates near zero, the economy should continue to gain strength allowing corporate profits to grow, dividends to rise and prices to trend higher over the next few years. Of course it won't come in a straight line and the farther we go before having a pause or correction; the chances of the next drop being larger continue to rise.
Interest Rates -- For the last 80-plus years the average yield on a U.S. Government Ten Year Bond has been a bit over 5 percent. The current yield is about 3 percent, up from 2 percent just months ago. It makes sense that rates are more likely to rise than fall over the next few years, but, that doesn't mean they have to rise in a hurry.
The best way out of our fiscal and debt situation here in the U.S., as well as abroad, is to get economies growing and to put more people back to work which will result in more tax revenue. I don't think the Fed is anxious to see rates rise too quickly and stall the current recovery. In other words, I don't think it's time to panic about rates going through the roof -- but then again I hesitate to make predictions.
Rising Rates as the Investors Friend -- I disagree with media promoting rising rates as a disaster for investors. Generally, when rates rise it is because the economy is doing well. While bonds may not shine in this environment, other economically sensitive investments like stocks and high yield corporate bonds tend to do OK for a while until the rising rates cause the economy to slow into a recession.
There is even a strategy for bond investors to benefit from rising rates. If your time horizon for your investment plan is longer than the maturity of the bonds in your portfolio, you will be able to reinvest the principal repayment of the maturing bond into new bonds with higher yields. The result would be more income in a few years. What you don't want to have is a portfolio full of 30 year bonds with low coupon rates that won't mature until they're in your kids account after you're gone.
Tom Breiter, president of Breiter Capital Management Inc., a registered investment adviser, can be reached at (941) 778-1900 or by e-mail at: email@example.com