OCEAN CITY — For the average equity investor, 2013 was certainly a year to celebrate. As financial markets and the global economy continue to normalize, we outline some key investor resolutions for 2014.
Resolution #1: Pay attention to the economy and the Federal Reserve. The macroeconomic backdrop has been a critical determinant of asset performance in recent years. We think that will continue to be the case in the year ahead.
Resolution #2: Check on corporate America’s earnings. A key feature of this year’s equity market gains has been multiple expansion — an increase in the price/earnings ratio. We are optimistic that improving economic growth should support stronger earnings growth with U.S. and global GDP accelerating in the year ahead.
Resolution #3: Temper enthusiasm for equities. Few investors expected stocks to perform as strongly as they did in 2013. At the beginning of the year even the most bullish sell-side strategists were only looking for gains of around 13%. But after a 30%+ rally, the S&P 500 index is no longer undervalued but rather is closer to fair value, in our opinion. That’s not to say we are not constructive on U.S. equities.
Our expectations are more in line with long-term equity returns. At present, BofAML Global Research forecasts the S&P 500 to finish 2014 at 2000, or just 9.0% higher than its current level, generating less than half the returns for 2013.This brings us to the final resolution.
Resolution #4: Invest according to goals. As past CIO publications have noted, we believe investors should first and foremost invest according to their goals and regularly measure progress toward them. U.S. equities have had a great run, with the S&P 500 rising more than 150% from the lows of 2009. As the global economy and asset markets begin to normalize in 2014, we recommend clients consider rebalancing their portfolios, if need be, and bring them more in line with their strategic asset allocations.
A proper rebalancing plan is one way to reduce the likelihood that such deviations from goals-based allocations could become unintended risks. Happy investing in 2014.
(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)