Investment Directions – December 2013
- The Economy: Slowly Moving in the Right Direction
We expect modestly faster growth in 2014 in the United States and globally. A combination of less fiscal drag and stronger consumer balance sheets should allow the U.S. economy to edge past the post-recession 2% level to around 2.5%. Global growth should accelerate to around 3.5%.
- Interest Rates: Low for Longer
Growth picking up should lead to slightly higher interest rates, mostly through higher real rates, or the interest rate after inflation. As the Federal Reserve (Fed) tapers its bond-buying program—possibly beginning over the next few months—we believe the 10-year Treasury yield will modestly climb around 0.5% next year. The Fed is likely to keep short-term interest rates anchored at zero, keeping long-term rates from sharply increasing, or “melting up.”
- The Not-So-Good News
A few things temper our outlook. Wage growth is likely to remain subdued, a result of long-term factors, namely demographics, technology and global labor competition. That means household spending is likely to remain soft. And political dysfunction continues to represent a risk for the economy and the markets, as budget and debt ceiling debates will persist through 2014.
- Bottom Line: We Favor Stocks, Especially International Ones, and Remain
Cautious Toward Bonds
Equities are no longer cheap, but they may offer a better alternative to cash or bonds for many investors. That said, the United States is looking fully valued. While stocks can move higher, gains will need to come from earnings growth, rather than further multiple expansion. Outside of the United States, stocks look more reasonably priced, especially in emerging markets. Within fixed income, put simply, there are few bargains.