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As 2013 draws to a close, you may be wondering what to expect in the year ahead, and how to prepare your portfolio accordingly. A new piece, BlackRock’s 2014 Outlook—The List: What to Know, What to Do is here to help you.

In this 2014 outlook piece, Jeffrey Rosenberg, Peter Hayes and I have put together a list of five “what to know” (or expect) items and five “what to do” investing ideas, all designed to help you navigate the markets in 2014.

So what are the five things you should know for 2014? The short answer is to expect more of the same. Many of the conditions of the last few years — including slow growth, low interest rates and very low inflation— are likely to persist. Drilling down into our list, here are the five things to know:

1.)   The Economy: Growing, Albeit Slowly. While expect a modest improvement in growth next year, for the first time in a while, there’s as good a chance of growth surprising to the upside as there is of growth surprising to the downside. We expect U.S. economic growth to improve slightly to around 2.5% next year from 2%, supported by the Federal Reserve (Fed)’s easy-money policies, stronger household balance sheets, a healing housing market and lower energy prices. That said, a weak labor market and Washington dysfunction pose headwinds to growth.

2.)   Interest Rates: Higher, But Not Through the Roof. Modestly higher growth should lead to slightly higher interest rates, with the 10-year Treasury modestly climbing around 0.5% next year.

3.)   Inflation: The Risk is to the Downside. Inflation remains close to historic lows and we don’t see that changing in 2014.

4.)   Employment: Jobs Are Growing, But Wages are Not. While the unemployment rate is likely to drop next year, U.S. wage growth is likely to remain subdued given long-term demographic, technology and global labor trends.

5.)   More Policy Uncertainty Means More Volatility. Volatility is likely to increase if – or when – political dysfunction again emerges.

 

So what does this mean for your portfolio? Five things:

1.)   Stick With Stocks. . . For Now. While 2014 is not going to be an ideal economic environment, it should support further gains in stocks and we would still overweight equities.

2.)   Seek Greater Growth Opportunities Abroad. While the U.S. stocks look fully valued, international stocks – particularly those in emerging markets — appear more reasonably priced. As such, we advocate that investors underweight non U.S. stocks consider paring back some U.S. holdings in favor of international exposure, and for those investors with a strong stomach and a long time horizon, we like emerging markets.

3.)   Bond Buyers Beware: Once Thought Safe, Now Risky? Put simply, there are few bargains in traditional bonds. Given the Fed’s plan to pull back on its extraordinary bond-buying program, the risks to traditional bonds are elevated. As such, being flexible and diversified globally on the fixed income side of your portfolio remains key. More on that from Jeffrey Rosenberg later this week.

4.)   Consider Munis for Tax-Exempt Income. We believe muni market fundamentals remain sound and municipal bonds look attractive, but I’ll let Peter Hayes give you the full story on the case for muni bonds later this week.

5.)   Go Beyond Traditional Stocks and Bonds. With stocks no longer cheap and neither bonds nor cash offering compelling values, we advocate incorporating alternative strategies into a portfolio.

Want more details? Check out the full list, as well as my special edition “2014 outlook” Investment Directions, a new outlook paper from the BlackRock Investment Institute and stay tuned for more on fixed income in 2014 from my colleagues later this week.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

 

Source: BlackRock’s 2014 Outlook—The List: What to Know, What to Do

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