Two common questions investors ask themselves at the beginning of any year are: What is the stock market going to do this year? And, how should I position my portfolio as a result?
To provide some insight as to what may be in store for the year, we’ve taken a look at what seven of the biggest financial institutions in the world are predicting for 2014. As you read through these, it’s important to keep in mind that your portfolio’s allocation should be based on more than just a forecast—you also need to consider your long-term goals, cash flow needs, risk tolerance, and other factors related to your investment plan.
How Will the S&P 500 Perform in 2014?
Morgan Stanley - S&P 500 +9%1
Morgan Stanley equity strategist Dr. Adam S. Parker thinks the S&P 500 is set to rise 9% in 2014. Morgan Stanley’s strategy recommendations are to favor small cap stocks versus large cap, and at a sector level they prefer health care to consumer staples, technology to consumer discretionary, and chemicals to industrials and energy. Within financials, they like capital-market-sensitive banks and asset managers over insurers and regional banks.
The risks Morgan Stanley highlights are demand weakness in the emerging markets, a policy error from the Federal Reserve, and a strengthening dollar, which can be a drag on profits earned overseas by US companies.
Overall, however, they remain optimistic and wouldn’t be surprised to see the S&P 500 remain robust.2
Goldman Sachs - S&P 500 +2.9%1
“S&P valuation is lofty by almost any measure,” says Goldman Sachs equity strategist David Kostin. Mr. Kostin thinks that with the rise in the S&P 500 last year, it now trades close to fair value and that any further increase will rely more on profit growth growth than P/E expansion.
As of December 31, the S&P 500 traded at 15.4x next year’s forecast earnings, and Mr. Kostin notes that the S&P 500′s P/E multiple has exceeded 17x during only two periods in history. One lasted from 1997 through 2000 during the tech bubble, and the other was a four-month period that spanned 2003 and 2004. It is for this reason Mr. Kostin does not believe that P/E’s will expand much further from here.
Overall, Goldman Sachs seems more cautious than optimistic about the stock market outlook from here.3
J.P. Morgan - S&P 500 + 12.3%1
J.P. Morgan thinks it could be an even better year for the S&P 500 than Morgan Stanley does. Chief Equity Strategist, Tom Lee, predicts that the S&P will finish 2014 at a level of 2075, which represents a 17% increase from December 13, 2013 (when he made the forecast) and a 12.3% increase from December 31 levels.
Mr. Lee thinks we are in a “classic bull market,” in which the sixth year is typically strong. He thinks some of the drivers could be an acceleration of earnings per share growth, the consumer coming to life more than expected, and better than expected economic growth tied to a pickup in investment spending.4
Deutsche Bank - S&P 500 +0.2%1
Equity Strategist David Bianco, who was once considered one of the more “bullish” forecasters on Wall Street, sees 2014 as being more subdued than many other pundits. He thinks it will be a year of normal earning per share (EPS) growth, normal price to earnings (P/E), but also normal volatility. By this, he means that he expects to see a market correction for the S&P 500 in the 5% - 9.9% at some point in the year.5
On a sector level, however, Mr. Bianco likes techonology, citing attractive valuations and low P/E ratios. He notes that mega-cap EPS did not drop during the 2008-2009 recession, and he thinks EPS growth could accelerate in 2014 with more corporate IT spending.6
Mr. Bianco isn’t necessarily bearish on the year given his flat forecast—he still expects the S&P 500 to reach 2,000 by 2015.5
Barclays - S&P 500 +2.9%1
U.S. Equity Strategist Barry Knapp sees the S&P 500 ticking up to 1,900, just like David Kostin of Goldman Sachs. Mr. Knapp thinks that the Fed will exit its quantitative easing programs on a longer-than-expected schedule, and he sees a stock market correction in the first half of the year in the 8% - 9% range.
On a sector level, Mr. Knapp likes consumer staples, industrials, and technology, but he is less favorable to utilities.7
BMO Capital - S&P 500 +2.9%1
Yet another prediction for a +2.9% increase in the S&P 500 comes from Brian Belski of BMO Capital. Mr. Belski is typically known as more of a “bull,” but for 2014 his forecast is more subdued as he wonders how investors will react to the Fed “tapering” quantitative easing programs over the course of the year.
He sees the market doing well in the first half of the year, perhaps crossing the 2,000 level on the S&P, but beyond that he is concerned that investors will grapple with the removal of stimulus by the Federal Reserve. Mr. Belski did note, however, that any Fed-induced weakness should not necessarily be viewed as an end to the bull market.8 In fact, he thinks we’ve entered a secular bull market, one that could last 15 – 20 years!9
Credit Suisse - S&P 500 +6.1%1
Credit Suisse economists predict that in 2014 equities should continue to outperform other asset classes like cash, commodities, and bonds, with stock prices being supported by global economic growth and favorable interest rates.
On a global level, the Head of EU Global Strategy Research, Andrew Garthwaite, sees global equities rising 13% in 2014.
At the same time, Credit Suisse noted that it could be a volatile year. Their Head of Strategic Advisory, Jonathon Wilmot, cited that really strong growth could help push risk appetite to euphoria and make bond yields temporarily overshoot to the upside, triggering a market correction.
What Do These Stock Market Predictions Mean For Your Portfolio?
The outlook for the market as detailed above is generally positive, but to varying degrees. Additionally, many forecasters believe that a market correction could occur in 2014. How should you allocate your portfolio as a result? Are there strategies to prepare for the possibility of a stock market correction?
Market forecasts can help give a sense of what to expect in the coming year, but they aren’t always correct, and you should not base your portfolio’s asset allocation solely on a market prediction. Instead, your primary focus should be to allocate your portfolio based on your long-term goals, risk tolerance, cash flow needs, and other aspects of your investment plan, like your investment horizon. Once you’ve established that, you and your financial advisor can make a decision about how much of your investment portfolio should be allocated to equities.
WrapManager Can Help You Determine Your Portfolio’s Asset Allocation for 2014
Our Wealth Managers can help you determine how your portfolio should be positioned now, based on your stated goals and needs as well as what we think is in store for the market this year and beyond. If you’d like to discuss your specific situation as well as any of the market forecasts detailed above, please give us a call at 1-800-541-7774, or click here to get started. We’d be happy to spend some time discussing the markets and your portfolio with you.
Sources:
6 Barron's
