Investment Directions – February 2014
- Volatility Is Back
After a relatively tame 2013, market volatility returned in January and early February amid emerging market (EM) turmoil and disappointing U.S. economic reports. Though we foresee modestly higher U.S. and global growth in 2014, the combination of further soft economic data, Federal Reserve (Fed) tapering, and turbulence in emerging markets means more volatility in the weeks ahead.
- Rates Likely to Modestly Rebound
Yields have plunged recently amid market volatility, but we still expect the 10-year Treasury to rise in 2014 to around 3.25% to 3.5% by year’s end. Although the Fed has begun its long-awaited taper, it’s likely to keep interest rates low until inflation is close to its long-term goal of 2%. With labor market conditions remaining soft and inflation well below the Fed’s target, we expect short-term interest rates to remain low for an extended period of time.
- Stocks Still Look Attractive
We continue to advocate overweighting stocks. While we expect a rockier ride and more muted gains in 2014, we believe stocks can still offer better value than bonds. In fact, the recent drop in interest rates has made bonds look even more expensive in comparison to equities.
- Especially International Ones
While U.S. equity market gains will likely be more modest this year than in 2013, international stocks have more room for multiple expansion, and we continue to advocate exposure to select developed and emerging markets. Within fixed income, there still are few bargains, although high yield looks interesting on a relative basis. Finally, we see low inflation, higher real rates and a recovering global economy further dampening demand for gold.