Factors expected to help U.S. markets include low anticipated inflation, better employment, pent-up demand for consumer goods and an improved overall business climate, according to a panel of investment experts at Prudential Financial.
In economic terms, Prudential expects the next few years to bring average real GDP growth of 3% to 3.5%, nominal GDP growth of 5% to 6%, corporate earnings growth of 7% to 10%, and equity returns in line with earnings growth, at 7% to 12%.
Factors that could reverse growth or harm individual investors include excessive investment valuations, public policy surprises or other shocks—especially unexpected inflation. If a bear market is to start in 2014 or 2015, it will likely be because of higher inflation or fears that the Federal Reserve will move more aggressively than expected to fight the threat of inflation.
Edward Keon, managing director for Quantitative Management Associates, a Prudential Financial company, says the more global markets and economies improve, the more they begin to resemble pre-2008 levels. Keon expects significant growth in 2014, driven in part by technological innovations and a jump in energy production in the U.S. and globally.
Keon is also positive on another important factor for 2014: how successfully new Federal Reserve Chairman Janet Yellen will steer the central bank’s effort to wind down its bond-buying stimulus program as employment numbers and other indicators approach more normal levels. He expects the Fed to remain largely on the sidelines as markets continue to strengthen, keeping interest rates low even as it slows the pace of bond buying.
Quincy Krosby, a market strategist, says she is cautiously optimistic on 2014, also noting that a major focus for U.S. investors will be the change in leadership at the Fed. Krosby believes Yellen will continue the trend of supplying forward guidance to markets in an attempt to ease volatility, though interest rate risks persist.
John Praveen, chief investment strategist for Prudential International Investments Advisers, also expects continued growth for 2014 fueled by strengthening global economies, low interest rates, liquidity support, an earnings rebound, fair valuation levels and easing global risks. He expects double-digit gains in the global stock markets, with the Dow Jones Industrial Average passing 18,000.
Praveen says he expects stocks in the Eurozone and Japan to outperform their U.S. counterparts in 2014, because of better potential for price and earning expansions in those markets. He expects the European Central Bank and the Bank of Japan to undertake further easing measures while the U.S. Fed begins to taper its quantitative easing program.
“Japan is more of a trading market than a resurging market this year,” Praveen explains, “and the emerging markets are going to be a big wild card this year.”
Prudential experts see attractive opportunities in the fixed-income sectors for 2014 as well.
Michael Lillard, chief investment officer of fixed income, says that ongoing, global monetary policy actions and historically low default rates will support the debt markets in 2014. He sees the strongest opportunities in higher-quality, high-yield bonds and longer-duration, investment-grade corporate bonds. Short-duration emerging market debt should also perform well, Lillard says.