Wall Street may be in for course correction in 2014

The Associated PressDecember 29, 2013 

NEW YORK —

2013 was a great year for the average investor, but few market strategists believe that 2014 will be anywhere near as good. The simple strategy of buying U.S. stocks, selling bonds and staying out of international markets isn’t going to work as well as it has, they say.

Some of Wall Street’s biggest money managers have come up with a few resolutions to help your retirement portfolio have a good year:

 • Curb your expectations. Few investors expected 2013 to be as big as it was. On average, market strategists expect 2014 to be somewhat tame. Most are looking for the S&P 500 to rise to 1,850 to 1,900 points, a gain of just 2 percent to 4 percent.

 • Keep your eye on valuation. Investors bid up stock prices to all-time highs this year, despite a mediocre economy and corporate profits that were less than spectacular. At the beginning of the year, the price-to-earnings ratio on the S&P 500 was 13.5, meaning investors were paying roughly $13.50 for every $1 of earnings in the S&P 500. Now the S&P 500’s P-E ratio is around 16.7.

While a P/E ratio of 16.7 won’t set off any alarm bells — the historical average is 14.5 — it is noticeably higher than it was a year ago.

Investors have high expectations for corporate profits next year, based on the prices they are paying.

“It’s hard to believe that this market can go much higher from here without some corporate earnings growth,” said Bob Doll, chief equity strategist at Nuveen Asset Management.

Profit margins are at record highs, and corporations spent most of 2013 increasing their earnings by cutting costs or using financial engineering tools such as buying back their own stock.

Earnings at companies in the S&P 500 grew at an 11 percent rate in 2013. The consensus among market strategists is that profit growth will slow to around 8 percent in 2014. However, if the U.S. economy continues to improve, and corporate profit margins expand, it could justify the prices investors have been paying for stocks.

 • Don’t get caught up in the euphoria. Be wary if your neighbor decides to jump head-first into the market next year. A large number of investors have remained on the sidelines for this five-year bull market. Since the market bottomed in March 2009, investors pulled $430 billion out of stock funds, according to data from Lipper, while putting nearly $1 trillion into bond funds.

Professional market watchers are concerned that many individual investors, trying to play a game of catch-up, might rush into the market with a vengeance next year. The surge of money could cause stocks to jump if investors ignore warnings that the market is getting overvalued. Wall Street calls this phenomenon a “melt-up.” As you can guess, a “melt-up” could lead to a “melt-down,” as happened in the late 1990s with the dot-com bubble.

“I fear people, who sat out 2013, will jump in too fast next year and get burned,” said Richard Madigan, chief investment officer for JPMorgan Private Bank.

Which leads us to:

 • Don’t panic, either. Stocks cannot go higher all the time. Bearish investors have been saying for months that stocks are due for a pullback in the near future. The S&P 500 is up 66 percent since the stock market’s last major downturn in October 2011. It has been resilient through several scares this year, including the conflict in Syria, the budget crisis and near-breach of the nation’s borrowing limit in October.

In their 2014 outlook, Goldman Sachs analysts said that while the market has been strong, they see a 67 percent chance that stocks will decline 10 percent or more in 2014, which is known as a stock market “correction.” Goldman analysts still expect stocks to end the year modestly higher.

 • Cut your exposure to bonds. Fixed-income investors had a tough year in 2013. The Barclays Aggregate bond index, a broad composite of thousands of bonds, fell 2 percent. Investors in long-term bonds were hit even harder, losing 15 percent of their money since the beginning of the year, according to comparable bond indexes.

2014 is not looking good for bond investors, either.

The Federal Reserve has started to pull back on its bond-buying economic stimulus program. That means one of the biggest buyers of bonds for the last year will slowly exit the market in 2014. That doesn’t mean investors should avoid bonds altogether, strategists say.

Instead, investors should reorganize their portfolio to focus more on bonds that mature in relatively short periods of time. The prices of those bonds tend to fluctuate less than those of bonds that take longer to mature, and are less likely to lose value when interest rates rise, as many expect will happen in 2014.

Madigan said that under normal circumstances he would advise investors to hold bonds that mature in an average of about five years. This measure is referred to as a bond’s “duration.”

For 2014, Madigan is advising investors to restructure their portfolio to have an average duration of two to two-and-a-half years.

 • Your stock market alternative in 2014 is ... stocks. Other than stocks, the average investor typically has access to three other types of investments: cash, bonds and commodities such as gold. None are expected to perform better than the stock market next year.

 • Study abroad. Several market strategists believe international stocks will be the place to be next year. Asian and European stocks did not perform as well as U.S. stocks in 2013, with the notable exception of Japan, where the Nikkei 225 index soared 53 percent.

Europe is particularly attractive, they say. The European Union came out of a two-year recession in 2013, and the debt crisis that plagued most of the region has abated. Some strategists say that Europe is a couple of years behind the U.S. in its economic recovery, and stocks could be relatively cheap in comparison.

“The big debate among my team is whether international markets will play catch-up next year,” said Madigan of JPMorgan Private Bank.

Predictions from market experts for 2014

It is an understatement to say stock market investors had a good year in 2013. The Standard & Poor’s 500 index soared 28 percent, its best year since 1997. Including dividends, it gained 30 percent. It stood at xxxx on Friday.

What lies ahead after this historic year? The Associated Press asked leading market analysts and investment managers where they see the Standard & Poor’s 500 index winding up by the end of 2014 and why.

CITIGROUP

Year-end target: 1,900.

Reasoning: Modest improvement in the economy and better company earnings. Enticed by higher returns, investors will move some cash from bonds back into stocks.

BANK OF AMERICA MERRILL LYNCH

Year-end target: 2,000.

Reasoning: With the Federal Reserve likely to end its bond-buying program, bonds face a tough year. In stocks, the focus will be large multinational companies that can benefit from an improving global economy.

GOLDMAN SACHS

Year-end target: 1,900.

Reasoning: The rally of 2013 cannot continue into 2014. Stocks are no longer cheap. Investors are paying more than $16 for every $1 of earnings, versus about $14 at the beginning of 2012. Stocks will keep rising, but more modestly, Goldman analysts say.

BARCLAYS CAPITAL

Year-end target: 1,900.

Reasoning: The Fed pulling out of its stimulus program will lessen the support for U.S. stocks over the next year. Investors should focus on corporate earnings, as well as the modestly improving economy.

WELLS FARGO SECURITIES

Year-end target: 1,850-1,900.

Reasoning: The stock market will trend higher next year, but the returns are unlikely to repeat the gains of 2013. Another round of budget battles between the White House and Congress as well as a new Fed chairwoman will likely affect the market’s growth.

The Associated Press

The News Tribune is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service