The Investor’s Almanac – Portfolios Over Policy

A farming almanac is an annual publication containing a guide for the coming year and a forecast of the times and statistics of events and phenomena important to growing. Farmers' almanacs have been a source of wisdom, rooted in the core values of independence and simple living, for American growers for over 200 years. To help you plan for what lies ahead, we are pleased to bring you our Outlook 2014: The Investor’s Almanac. We hope our almanac will prove to be a trusted guide to the coming year filled with a wealth of wisdom for investors.

In the coming year, there are many reasons investors can return to the basics of growing and preserving their portfolios and spend less time gauging the actions of policymakers, including:

• After two “clean” lifts to the debt ceiling since 2011, which ensured any risk of default on Treasury obligations was avoided, we are unlikely to see concessions in exchange for a third increase in 2014—making a high stakes fiscal battle unlikely.
• The Fed is likely to begin to taper its bond-purchase program, known as quantitative easing (QE), early in 2014, signaling a commitment to reducing its presence in the markets and transitioning to a post-QE environment.
•  Europe is emerging from recession, which means less need for direct life support from the European Central Bank or painfully austere fiscal policy as deficit targets are eased.

The economy and markets becoming more independent of policymakers while growth accelerates is likely to bolster investor confidence in the reliability and sustainability of the investing environment.

Key components of LPL Financial Research’s 2014 outlook are:

• Stronger U.S. economic growth may accelerate to about 3% in 2014 after three years of steady, but sluggish, 2% growth. Our above-consensus annual forecast is based upon many of the drags of 2013 fading, including U.S. tax increases and spending cuts and the European recession, and growth accelerating from additional hiring and capital spending by businesses.

• Stock market total returns could likely be in the low double digits (10-15%). This gain is derived from earnings per share for S&P 500 companies growing 5-10% and a rise in the price-to-earnings ratio (PE) of about half a point from 16 to 16.5. The PE gain is due to increased confidence in improved growth allowing the ratio to slowly move toward the higher levels that marked the end of every bull market since WWII.
• Bond market total returns could likely be flat as yields rise with the 10-year Treasury yield ending the year at 3.25-3.75%. Our view for yields to rise beyond what the futures market has priced in warns of the risk in longer maturity bonds and our preference for shorter-term and credit-oriented sectors of the bond market. Our expectation for a 1% acceleration in U.S. GDP over the pace of 2013 suggests a similar move for the bond market.

In 2014, there may be more all-time highs seen in the stock market and higher yields in the bond market than we have seen in years as economic growth accelerates. The primary risk to our outlook is that better growth in the economy and profits does not develop.  That risk is likely to be much more significant than the distractions posed by Fed tapering and mid-term elections. In our almanac, we forecast a healthy investment environment in which to cultivate a growing portfolio in 2014.

View the complete Outlook 2014: The Investor’s Almanac in the Feature Tool & Tip section of our website at www.cornerstone-wealth.com.

This was prepared by LPL Financial.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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