Everyone should be delighted by the balances on their quarterly account statements and we hope the values hold steady throughout 2014. When including price changes and dividends:

  1. Standard & Poor’s 500 Index gained 32.39%.
  2. Nasdaq Composite Index gained 40.12% Russell 2000 Index gained 38.82%

As we know, the market runs ahead of the economy and most economists are optimistic for the coming year. In the J.P. Morgan charts that follow, you’ll see that the current price to earnings ratio for domestic stocks have exceeded the twenty-year average with the exception of large cap blend and growth. See “Returns and Valuations by Style.” Traders are looking for earnings growth to support last year’s market rise. See “Sources of Total Return.”
Consumers are positioned well if interest rates rise slowly and avoid dramatic shifts that affect home sales activity and overall consumer net worth. See “Consumer Finances.” Since there appears to be a consensus among experts, we have included Bob Doll’s predictions for the year ahead. He is the Chief Equity Strategist at Nuveen and former top strategist at BlackRock, the world’s largest asset manager.

  1. The U.S. economy grows 3% as housing starts surpass one million and private employment hits an all-time high
  2. 10-year Treasury yields move toward 3.5% as the Federal Reserve completes tapering and holds short-term rates near zero (see “Fixed Income Yields”)
  3. U.S. equities record another good year despite enduring a 10% correction
  4. Cyclical stocks outperform defensive stocks
  5. Dividends, stock buy-backs, capex, and M&A all increase at a double-digit rate
  6. The U.S. dollar appreciates as U.S. energy and manufacturing trends continue to improve (see “Manufacturing Momentum”)
  7. Gold falls for the second year and commodity prices languish
  8. Municipal bonds, led by high yield, outperform taxable bond counterparts
  9. Active managers outperform index funds
  10. Republicans increase their lead in the House but fall short of capturing the Senate

The risks to Mr. Doll’s predictions were highlighted in a January 6th, 2014 article in the Wall Street Journal posed as five questions:

  1. Will businesses finally shed their caution? (See “Corporate Profits and Leverage”)
  2. Will Washington’ s tentative truce continue?
  3. Will the Fed’s path out of bond buying get bumpy?
  4. Will the housing adjust easily to higher interest rates? 5. Will the rest of the world cooperate?

If you’ve watched the news over the past five years, it seems naïve to withhold doubt for 2014, but deep down…don’t you want to believe?

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