2013 was a great year for investors, as major stock indices closed the year with double-digit percentage gains and the S&P 500 and Dow Jones industrial average had their biggest gains since the late 1990s.
“The equity markets’ meteoric rise was a big surprise to people,” said Jamie Cox, managing partner at Harris Financial Group in Chesterfield County.
Cox joked that 2013 was “the most hated bull market ever,” because so few people really bought into the optimism, remaining skeptical even as the markets soared.
Some Richmond-area investment advisers expect 2014 to be a good year for investors, too, just not as stellar as 2013.
Cox, for instance, gives a better than 60 percent chance that the S&P 500 will see a 10 percent-plus gain in 2014.
Kent Engelke, chief economic strategist at Capitol Securities Management in Henrico County, gives a 75 percent chance the economy will expand by more than 4 percent in 2014, and stock prices will rise 12 to 15 percent, assuming government leaders in Washington do nothing to douse the growth.
Projections for economic growth in 2014 have become more optimistic recently, said Tim Jester, managing director of CapGroup Advisors in Richmond.
“We continue to think that stocks are going to do pretty well in 2014,” he said.
Like other investment advisers, however, he added, “I don’t think they will do anything like what they did in 2013.”
Some local investment advisers and some of Wall Street’s biggest money managers offered a few resolutions to help your retirement portfolio have a good year:
Curb your expectations
Few investors expected 2013 to be as big as it was.
On average, market strategists expect 2014 to be more subdued than the previous year.
“We do not expect another year like (2013),” said Chris Singleton, managing director at Kanawha Capital Management LLC in Henrico.
Stocks should continue to have momentum in 2014 assuming global economic growth continues and there are no major “external shocks,” he said.
At the same time, investors should be prepared for corrections in the market.
“We have not had a correction in a while and stocks are no longer cheap, depending on your measurement of choice,” Singleton said. “They are not nearly as attractively priced as they were a year ago, although they are not terribly expensive, either.”
But it is too early to say that stock prices are in a bubble, local investment advisers say.
“The fact that there are a lot of people using the term ‘bubble’ is actually an indication that we are not in a bubble,” Singleton said.
Rather, the time for stock market participants to worry is when skepticism gives way to an unbounded optimism about stocks, he said. That doesn’t seem to be the case right now.
“As a group, investors are certainly more sanguine in their outlook than they were a year ago, but there’s still quite a bit of skepticism,” he said.
“It is healthy for the market that there is a lot of skepticism.”
Keep your eye on valuation
Investors bid up stock prices to all-time highs in 2013.
At the beginning of the 2013, the price-to-earnings ratio on the S&P 500 was 13.5, meaning investors were paying roughly $13.50 for every $1 of earnings in the S&P 500.
At the start of 2014, the S&P 500’s trailing P-E ratio was just over 20, Jester said.
Profit margins are already at record highs, and corporations spent most of 2013 increasing their earnings by cutting costs or using financial engineering tools such as buying back their own stock.
Earnings at companies in the S&P 500 grew at an 11 percent rate in 2013. Market strategists believe profit growth may slow to around 8 percent in 2014.
However, if the U.S. economy continues to improve, and corporate profit margins expand, it could justify the prices investors have been paying for stocks.
Jester said prices for stocks are still attractive when compared with alternative investments.
“You are willing to pay more for a stock because your alternative in the fixed-income sector is offering so little yield,” he said.
Current valuations are “nothing too concerning, particularly in the large-cap area,” he said. “Small caps have gotten somewhat expensive.”
Don’t get caught up in euphoria
A large number of investors have remained on the sidelines for this five-year bull market.
Since the market bottomed in March 2009, investors pulled $430 billion out of stock funds, according to data from Lipper, while putting nearly $1 trillion into bond funds.
Some professional market watchers think many individual investors, trying to play a game of catch-up, might rush into the market with a vengeance in 2014.
The surge of money could cause stocks to jump if investors ignore warnings that the market is getting overvalued.
Wall Street calls this phenomenon a “melt-up,” which could lead to a “meltdown,” as happened in the late 1990s with the dot-com bubble.
“I fear people who sat out 2013 will jump in too fast next year and get burned,” said Richard Madigan, chief investment officer for JPMorgan Private Bank.
However, 2014 could be a year when the “mom and pop” investors who may have been underinvested and missed out on some of the big opportunities in 2013 will have a chance for good returns, Harris Financial’s Cox said.
He foresees the market gains in 2014 being led by some of the more traditionally safe investments, such as those in energy and banking, which did not fare as well as high-growth stocks in 2013.
Don’t panic, either
Stocks cannot go higher all the time.
Bearish investors have been saying for months that stocks are due for a pullback in the near future.
In their 2014 outlook, Goldman Sachs analysts said that while the market has been strong, they see a 67 percent chance that stocks will decline 10 percent or more in 2014, which is known as a stock market “correction.”
Goldman analysts still expect stocks to end 2014 modestly higher.
Cut your exposure to bonds
Fixed-income investors had a tough year in 2013.
2014 is not looking good for bond investors, either.
The Federal Reserve has started to pull back on its bond-buying economic stimulus program. That means one of the biggest buyers of bonds for the last year will slowly exit the market in 2014. The Fed’s exit could send bond prices falling.
That doesn’t mean investors should avoid bonds altogether, strategists say.
“Bonds continue to have a place in a portfolio,” Cox said. “People still need fixed-income exposure.”
“So I would caution against getting rid of that,” he said. “If you have got 80 percent of your portfolio in fixed income, you should reallocate.”
Investors should reorganize their portfolio to focus more on bonds that mature in relatively short periods.
The prices of those bonds tend to fluctuate less than those of bonds that take longer to mature, and are less likely to lose value when interest rates rise, as many expect will happen in 2014.
“We are advising our clients to be modestly overweight in equities at the expense of bonds,” said Jester of CapGroup Advisors.
Your stock market alternative
Other than stocks, the average investor typically has access to three other types of investments: cash, bonds and commodities such as gold.
None are expected to perform better than the stock market next year.
Gold declined in 2013 and is expected to have another tough year in 2014, with inflation under control and the Fed expected to gradually exit the bond market.
Analysts at Barclays Capital expect gold to end 2014 at $1,270 an ounce, about 5 percent higher than where it is today.
Cash is expected to provide a near-zero return next year, as it has for several years now. Savings and money market-accounts are returning less than 0.1 percent on average.
Some market strategists believe international stocks will be the place to be next year.
Europe is particularly attractive, they say. The European Union came out of a two-year recession in 2013, and the debt crisis that plagued most of the region has abated.
Some strategists say that Europe is a couple of years behind the U.S. in its economic recovery, and stocks could be relatively cheap in comparison.
Jester of CapGroup Advisors said he sees Europe as a good place for investments in 2014. “We think Europe is going to continue to improve at a slow rate,” he said.
Jester was more optimistic about the outlook for emerging markets late in 2013 than he is now, as there are signs of cash outflows and deteriorating profits in those markets along with inflation creeping up.
The Associated Press contributed to this report.