In my view, fiscal tightening in 2013 and attendant mediocre economic performance this year have masked improving fundamentals. Investors clearly see reason to feel confident that the U.S. economy, while not roaring ahead, is likely poised for steady growth.
We don’t have to look far to find current headwinds: persistent ill effects of sequestration; ongoing risk of further sequestration and even another debt-limit fight come January.
But when we look beyond the empty half of the glass, we see surprisingly strong jobs growth posted for October, with 204,000 nonfarm jobs added to the U.S. economy1 – despite the month’s government shutdown. And as I write this on November 18, 2013, I am watching several U.S. equity indexes hitting all-time highs, including the U.S. large-cap Russell 1000® Index.
Fixed investment and consumer spending to drive growth
I see plenty of reason to believe the economic recovery will continue. In fact, our strategists at Russell are more upbeat than most – our Strategists’ Outlook and Barometer for Q4 2013 forecast year-on-year growth in 2014 of 2.9 percent, versus a consensus of 2.5 percent. We base this projection on an expectation of healthy consumer spending; expansion in non-residential fixed investment, and monthly jobs growth that could plateau near 230,000 in 2014.
Some observers of the economy put credence in the notion of stall speed, such that shocks large enough to tip the economy into recession would pose a persistent danger. In this case, we could expect fairly frequent recessions, given today’s relatively low trend rate of growth. In our view, recessions are not the result of a few missed strokes in the economic engine that cause a dip below stall speed. Instead, recessions such as the one we’re emerging from often result from a shift in economic gears, and a lower cruising speed doesn’t necessarily mean things are at risk of coming to a halt.
In addition, the Federal Reserve’s commitment to highly accommodative monetary policy is bolstering confidence and helping support recent record-setting stock prices.2 The accompanying chart illustrates that two of the last three years will have been ones with economic growth less than 2 percent. Meanwhile, the broad Russell 3000 stock price index has risen at a double-digit clip in two of these years (using projections for 2013 annual economic growth through November 7, 2013, and stock prices through November 18, 2013).
Data as of November 19, 2013. Russell 3000 Index return as of November 18, 2013
Economy needs to validate investors’ faith
But investors need to keep one thing in mind: Much of the current high value in equities comes from anticipations of better economic growth next year. Stocks have risen this year on the expectation of better things to come. So 2014 needs to be a year in which we see those expectations for growth validated. Thus, our base case is that for equity markets 2014 will be more a year of validation than appreciation. Overall, we anticipate modestly positive price appreciation of around 5 percent during 2014 –depending, of course, on actual corporate performance.
Of course, the risk of unexpected bad news is ever-present, and the U.S government certainly has shown itself capable in recent months of manufacturing its own brand of economic impediment. Still, we anticipate a reasonably positive year in 2014, and, as always, we believe prudent investors will do well to take on only a level of risk they can survive.
1 US Bureau of Labor Statistics, November 8, 2013 press release.
2 “Not So Fast: S&P 500 Touches Record Highs, Then Pulls Back ”, The Street, November 18, 2013.
Copyright © Russell Investments 2013. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.