In December, people take time to reflect on the past year and think about the next. Here at Russell Investments our year-end contemplation goes beyond planning an extra trip to the gym. Instead, we’ve put our best investment thinking and analysis into a single, year-end report: Annual Global Outlook for 2014.
Its theme can be summed up simply: “Validating the 2013 Rally.” As I noted in our blog a month ago, some markets this year have outperformed even the most glassy-eyed expectations. U.S. small-cap stocks, as reflected by the Russell 2000® Index, were up 40.6 percent for the 12-month period ending Nov. 8, 2013; international developed markets were up roughly 25.5 percent. Impressive gains by anyone’s measure.
Now, as our Annual Global Outlook explains, maintaining that pace will be challenging as we navigate 2014. In our view, the coming year will see U.S. equity returns in the single digits, and even these results will be dependent on actual corporate profits for gains. Europe and Japan will likely continue to heal economically, while the memory of the financial crisis will justifiably temper some investors’ exuberance. Elsewhere in our analysis, we can expect continued headwinds for fixed-income investments.
Perhaps the most immediate issue will be U.S. Federal Reserve policy. The Fed’s past efforts to prime the economic pump and fight deflation have put a squeeze play on investors, forcing them to increasingly buy risk assets in order to approach the levels of return necessary to meet long-term outcomes. This process and the resulting pressure on investment portfolios likely will continue in 2014, with the added twist that the Fed also seems resolved to reduce its money-printing policies. So extra volatility is a good bet, given the market’s past hyperventilating at any talk of winding down quantitative easing (QE).
My cautious tone is symptomatic of realism, not pessimism – we simply believe 2014 will be a time during which investors must carefully manage risks through the year while focusing more precisely on key investment exposures to generate returns. The Annual Global Outlook explains this view: When risk is taken and understood in a disciplined way, it may be used to help yield results that ultimately support investors’ outcomes. We believe portfolios can and should be dynamically tilted to take into account business cycles, risk premiums, technical aspects of investing as well as fundamentals, investor psychology, and value opportunities. We also believe current conditions are particularly well-suited for this sort of holistic, multi-asset discipline.
So kindly take some time to review the Outlook report. If any of our investor and advisor friends are making resolutions for the New Year, we believe this piece should be on their reading list.
 Russell Developed ex-U.S. Index, for the 12-month period ending November 8, 2013.
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.
Index returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Indexes can not be invested in directly.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
The Russell Global ex-U.S. Index measures the performance of the global equity market based on all investable equity securities, excluding companies assigned to the United States.
The Russell Global ex-U.S. Index is constructed to provide a comprehensive and unbiased barometer for the global segment and is completely reconstituted annually to accurately reflect the changes in the market over time.
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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.
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.
Russell Investment Group, a Washington USA corporation, operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
© Russell Investments