As the year draws to a close, investors are searching for clues as to what may be in store for the economy and markets in 2014. What have we learned from the markets in the month of November? Honestly, not very much. The scenario has not changed much in the last 30 days.
As my colleague Sam Wardwell has chronicled in his weekly market reports here on follow fPioneer, the U.S. has seen steady, slow growth and improvement in some leading indicators, such as the PMI Manufacturing Index for November, which came in above consensus at 54.7, a 10-month high.
More significantly, new orders, which provide an indicator of activity for the coming months, rose strongly from 52.7 to 56.2. The better PMI, led by the increase in new orders, suggests that we may see an increase in capital investments and overall manufacturing activity going into 2014, which should help sustain economic growth in general in the U.S. This trend is important because it is another little step in our scenario for a better recovery going into 2014.
Of course, investments are a nice part of the picture, but not enough. We also need consumption, which for the moment is still weak (though lower gas prices could help to strengthen it a bit). A reduced fiscal drag will also help growth. Consumers digesting the current effects of 2013’s tax changes along with fewer tax increases in 2014 should help. If these elements come together, we believe they could lead to growth that is just a little better in 2014 – maybe .5% to 1% better than what we’ve seen so far in 2013.
The U.S. equity market faces two other important issues:
- Budget discussions – We should have a lot between December and January. Our assumption is that nobody wants a repeat of the experience that we had in October. We think that a deal will be made, and it may be made quickly.
- Fed tapering – Is the Fed going to taper in December? Is the Fed going to taper in March? No one knows. We do know that if they decide to taper, it will be due to improving economic activity. If economic activity is not better, they will not taper. I still see this as a win-win situation for equities.
We believe the market will move higher in 2014 because earnings should re-accelerate to close to 15%. I think that would be very good for the market. Obviously, if that happens it means that the economy is better and that we will see tapering, which will most likely result in more volatility. However, I think this will just create opportunity on the equity side.
Global Equities: Concerns in Europe – Preference for U.S. and Japan
I’m a little bit more concerned about Europe, although I do expect European equities to be positive in 2014. The rally that we saw between August and October has lost steam. Remember that European equities were a big underperformer in the first part of the year. European equities also need earnings growth to continue to rally going to next year. GDP growth forecast in Europe for next year is in the 0.2% to 0.3% range. So I don’t see that the European companies growing earnings faster than U.S. or Japanese companies. That’s why our global equity focus will continue to show preference for the U.S and Japan. In Europe, we prefer the regions that are fairly immune from the fiscal problems, preferring investments in Germany, the United Kingdom and Switzerland.
So our outlook hasn’t changed much recently. I think some of the pieces for a better economic outlook are in place to justify our outlook for 2014.
© Pioneer Investments
