As we enter 2014 we see continued stimulus by the FED that is likely to keep interest rates from rising significantly this year. Although many of the risks we faced in recent years are still on the table, we have seen improved employment figures and rising consumer confidence that is creating a more optimistic outlook for 2014.
This is not to say that market risk is low. In fact, most measures of market value point to a market that is poised for at least a modest correction this year. It has been over two years since we have had a 10% market correction, which is normal, healthy, and long overdue.
Although we don’t have a crystal ball, and don’t know what might instigate such a correction, we know there are many potential problems throughout the world that could represent the proverbial “straw that breaks the camel’s back” and bring down domestic stock prices to levels more in line with their underlying value.
We would be surprised, however, if the market were not higher by the end of December than it is now.
Easy money policies were prevalent in many other areas of the world in 2013, but since foreign stock markets did not rise nearly as much as in the United States, their values are generally more attractive, and less subject to a significant downturn in 2014.We are likely to overweight foreign stocks relative to domestic stocks this year until we see better values here at home.
Bond performance was negative in 2013 for the first time since 1999. It is clear the 30-year bull market for bonds is over, and that for the future, bond returns in a rising interest rate environment will represent a headwind to stock market performance.
Even though the FED plans to keep interest rates low through this year, all bets are off the table for 2015 and beyond, as long as the economy continues to recover, and a gradual unwinding of stimulus measures continues.
In what the PIMCO fund managers have coined ” the new normal”, average returns for both stocks and bonds, particularly in the United States, will be much lower in future years than we have seen for the past 30 years. This will have a significant effect for everyone approaching retirement in the next decade, and will require higher savings rates to ensure that people have enough money to survive in an environment where retirement can last up to 25 years longer than just one generation ago.
Careful planning beginning much earlier in life will be critical to financial independence for those people retiring in the 21st century.
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