Peeking Into 2014 - Commentary from Hutchens Investment Management

CONCORD, N.H. - Dec. 18, 2013 - PRLog -- Only one word can describe the stock market returns thus far in 2013 - - terrific. Old highs were surpassed for all major averages as Santa came in October and stayed well-into December. Throughout the year stocks climbed the proverbial “wall of worry” as Fed reliquification did its job and the economy began its transition from the mislabeled “New Normal” to a traditional business cycle. Briefly stated, in 2014 we anticipate moderate growth with real GDP rising 3%, increasing employment, low inflation, more normal interest rates, and rising corporate earnings.

The consumer, the major driver of the economy, enters the new year in far better financial shape as the net worth of US households, published by the Federal Reserve, rose to an all-time high of $77.3 trillion last September, having risen $7.65 trillion, or 11%, over the past twelve months. Most notably has been the increase in financial assets, along with rising home prices and declining debt. As the US economy moves away from the Fed bond purchases and the Government debt burden lessens, we expect economic growth to return to historic recovery levels. The 4Q2013 should be the last quarter of uninspired earnings growth and weak (1%-1.5%) real GDP. Hopefully, the strong employment gains across the board exhibited in November will continue, and with over three million job openings structural unemployment will begin to recede. The employment report is one of the data points indicating acceleration into year-end after the “dire” consequences of the Government shutdown.

We have no idea what the Fed will announce on Wednesday, December 18th regarding QE policy. Our often stated position is tapering will be much less disruptive to financial markets than traders and the media forecast. The impact of trading on the bond market should be muted. After Chairman Bernanke mentioned the possibility of a policy shift to tapering last May, the Treasury 10-year yield rose from about 1.5% to near its current rate of 2.8%. Bond prices fell across a broad spectrum and stocks, as measured by the S&P, fell 5.8% into early June. Despite brief selloffs in August and September the averages rose to record levels earlier this month and the S&P 500 today is about 13.5% above the June lows. Given the current shape of the yield curve and nominal GDP growth of about 3%, bond yields are in a normal range.

Our investment strategy remains positive on US corporate equities. However, the February 7, 2014 deadline on the debt level, the confusion of Obamacare, and the possibility of a brief negative reaction to Fed tapering may result in a selloff. Also, there may be a flurry of sales early in the year as investors defer the gains of 2013 into 2014. We believe that any weakness should be viewed as a long-term buying opportunity. In 2014 it will be the “Old Normal” with consumer spending, currently tracking at an impressive 3%, leading industrial production and driving corporate profits.

Authors:

David Minor
Rebecca Goyette

Editor:

William Hutchens