01-03-2014 10:57 AM
By John Toohey,
Vice President, Equity Investments
The book is now closed on 2013, and what a year it was for stocks. Standard & Poor’s 500 index gained over 32%, its best annual performance since the peak years of the late 1990s tech boom, and the Nasdaq Composite broke through the 4,000 mark for the first time in more than a decade.
This was certainly a pleasant surprise, given the year’s slow economic growth and stubbornly high unemployment rates, not to mention a government so polarized that it was forced to shut down for 16 days.
Now, as we begin a new year, what do we see ahead for the economy and the stock market?
First, we see the recent positive signals continuing into 2014. We expect real gross domestic product (adjusted for inflation) will grow by about 2.5% this year, up from less than 2% in 2013. Consumer confidence is growing, the nation’s housing market is getting stronger and unemployment is slowly improving. These are among the indicators that persuaded the Federal Reserve to start pulling back on its ultra-loose monetary policy, beginning this month.
The Fed’s monetary policy was a key driver for stock performance, as yield-starved investors seeking returns in an environment of low interest rates willingly paid more for each dollar of corporate earnings. The forward price-to-earnings ratio for the S&P 500 expanded above its 10-year average even as companies recorded scant revenue growth and earnings growth slowed considerably. For these reasons, it’s hard for us to see U.S. stocks performing as well in 2014 as they did last year.
Based on valuation, we see better opportunities in Europe and in developing markets. Greater domestic demand is boosting economic growth in Europe, and labor productivity and business confidence have been on the rise. And while GDP growth has slowed in key emerging markets, such as China and Brazil, valuations there are more attractive than in developed markets.
For more insights on the markets in 2014, please read our investment outlook.
USAA Investments Managed Portfolio Outlook
Our view of caution toward U.S. equities remains unchanged. We remain slightly overweight cash in our diversified managed portfolios. For investors interested in income-oriented bond investments, the USAA Intermediate-Term Bond Fund, the USAA High Income Fund and the USAA Income Fund are examples. For investors interested in tax-free income, the USAA Tax Exempt Long-Term Fund, the USAA Tax Exempt Intermediate-Term Fund and the USAA Tax Exempt Short-Term Fund are examples.
We also are overweight to assets that are positively correlated to inflation expectations. The USAA Real Return Fund also provides potential protection against the risks of long-term inflation.
Emerging markets represent another opportunity. Though they were hit especially hard recently, we believe that emerging markets remain attractive. They offer both an interesting long-term prospect for growth and compelling valuations. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.
As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for you based upon your individual goals, objectives, risk tolerance and time horizon.
This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.
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Past performance is no guarantee of future results.
As interest rates rise, existing bond prices fall.
Non-investment grade securities are considered speculative and are subject to significant credit risk. They are sometimes referred to as junk bonds since they represent a greater risk of default than more creditworthy investment-grade securities.
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Precious metals and minerals is a volatile asset class and is subject to additional risks, such as currency fluctuation, market liquidity, political instability and increased price volatility. It may be more volatile than other asset classes that diversify across many industries and companies.
The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange.
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High double digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future.
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The Real Return Fund may be subject to stock market risk and is non-diversified which means that it may invest a greater percentage of its assets in a single issuer. Individual stocks will fluctuate in response to the activities of individual companies, general market, and economic conditions domestically and abroad. When redeemed or sold, may be worth more or less than the original cost.
Diversification does not guarantee a profit or prevent a loss.