After strong 2013, what’s ahead for investors?

After strong 2013, what’s ahead for investors?

Provided by RBC Wealth Management and Eric St. Martin

If you’re an investor, you probably had a lot to smile about in 2013. After all, the Standard & Poor’s 500-stock index rose almost 30 percent, the biggest jump since 1997, while the Dow Jones industrial average gained 26.5 percent for the year. But 2013 is now in the books — so, what can you anticipate in 2014?

As baseball Hall of Famer Yogi Berra is quoted as having said: “It’s hard to make predictions — especially about the future.” And these words are certainly applicable for anyone who would like a precise forecast of the investment climate. Yet, it may be reasonable to say that the outlook for 2014 is pretty good, based on these factors:

• Greater spending by consumers — Consumer spending, essential to economic growth, may be on the rise in 2014. Consumer sentiment is improving and sales reports are looking up in some important areas, such as the auto industry. 

• Rise in corporate profitability — Corporate profits are generally the driving force behind the performance of the financial markets.  In 2013, corporate profits were generally strong, despite a somewhat sluggish economy marked by relatively weak consumer demand. Corporations were able to maintain profitability, due in part to their aggressive cost-cutting efforts. Assuming consumer spending does increase in 2014, corporate profits could be even stronger than they were in 2013.   

• Growth in manufacturing — Toward the end of 2013, industrial production in the U.S. hit an all-time high, and signs point toward continued growth in 2014.

• Increased supplies of energy — Domestic companies have greatly increased their oil and gas production, leaving Americans less dependent on foreign suppliers. In fact, the U.S. will become the world’s largest oil producer by the end of 2015, two years ahead of previous estimates, according to the International Energy Agency. As energy prices fall, consumers will have more money to spend in other areas — which should be good news for the financial markets.

• Brighter employment outlook— While unemployment remains high, the picture seems to be improving somewhat. A larger labor force means an increased demand for goods and services — which translates into economic growth and potential expansion of the financial markets. 

• Less “drama” in Washington — In December, Congress and the Obama administration reached a two-year budget agreement that may help avoid events, like the partial government shutdown of last October, that can disrupt the economy. This agreement should be favorable for the financial markets, which don’t like uncertainty. Still, there’s no guarantee of complete “smooth sailing” in Washington, as we could be looking at another debt-ceiling debate early in 2014.

• Low interest rates — When interest rates are low, it’s easier for businesses to borrow money to expand their operations; consequently, low rates typically act to stimulate the economy. And as 2014 began, interest rates remained near historic lows.  However, with the economy showing signs of strength, the Federal Reserve may allow rates to drift higher, but this increase will probably be a gradual one. Nonetheless, if the Fed ends its bond-buying program, which it began to help keep long-term rates low, you may need to pay close attention to your holdings in bonds, because their value will likely fall as rates rise. (Generally, bond prices move in the opposite direction of interest rates.) 

• Low inflation — As an investor, you probably don’t want to see high inflation. To illustrate: If your investments earn six percent after taxes, but the inflation rate is four percent, your “real” gain is just two percent.  But for the past several years, inflation has almost been a non-factor — so much so that some economists began worrying about deflation, which can actually have a negative effect on the economy and the financial markets. For 2014, the Federal Reserve is estimating that inflation will once again remain low, but not so low as to enter the deflation “warning zone.”

As the evidence shows, you may have the wind at your back as an investor in 2014. Still, even the most favorable projections can be off-target, so it’s a good idea, as always, to be prepared for anything. Your best move is to maintain a diversified portfolio of quality investments, tailored to your individual risk tolerance and specific goals. Consider hiring a financial professional who can help you meet your financial goals.

This article is provided by Eric St. Martin, a Senior Financial Associate at RBC Wealth Management in Stillwater, MN. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.  For additional information, please call 651-430-5535 or visit www.neumanwmgroup.com.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC

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