2014 Mid-Year Outlook Update: Living Actively Forecast Continues

Does 2014 at mid-year remain a “year of living actively” for investors as outlined in Russell’s 2014 Annual Global Outlook issued last December?  In that report, my colleagues on the global team of investment strategists agreed on the macro-view that 2014 would be better represented as a year of validation than a year of appreciation. And now, as we examine the underlying fundamentals in the macro- data at mid-year, I don’t see a reason yet to alter our “year of validation” call.

Let me explain why. First, we do not predict a recession in the U.S. market or globally, even in the face of spasms of geopolitical concerns that can dominate the news. While such news can further unsettle nervous investors, we believe markets already have largely discounted these risks. While we monitor events carefully, we also believe that geo-political volatility is a type of risk that can pay off for the active, yet disciplined, investor.

Secondly, we also know that headlines can create a piling-on effect of negativity for investors who already are unsettled by a low-return investment environment. While a pull-back from double-digit to single-digit returns isn’t any investor’s preference, we encourage investors to keep in mind that market returns for 2014, while lower compared to the previous two years, are actually quite average from a long-term perspective. The 10-year annualized return for the U.S. broad-market Russell 3000® Index, for example, was 8.2% through June 23, 2014, while the Russell 3000’s year-to-date return of 6.8% through June 23, 2014 is within 1.4 percentage points of that 10-year average.

So, yes, our “year of validation” theme for 2014 survives; but what about other views expressed in our Annual Global Outlook back in December? We are continually updating our tactical positions at Russell, and below I’ve listed some views on how 2014 is unfolding (as of June 30, 2014), all of which will be elaborated on in the upcoming quarterly update that comes out in mid-July:

• Global equities vs. fixed income: While our favored signals continue to point toward global equities over fixed income, our near-term view pulled back slightly in the month of June.
• Market valuation indicators: Within equities, we’ve slightly upgraded our views on both Europe and emerging markets (EM) and slightly downgraded the U.S. market.
• Business cycle indicators: Many of these indicators remain moderately positive, and our U.S. cycle score in particular provides enough evidence to keep our opinion that 2014 is a “buy the dips” market.
• Sentiment indicators: Sentiment scores for Japan, EM and U.S. Treasuries have shifted in the past month.

These tactical updates elucidate and refine why at mid-year our global market outlook continues to define 2014 as a “year of living actively” amid low-return markets. This is not a ‘set and forget it’ year. In a low return, and increasingly volatile, world we believe that top-down discipline and active management becomes more important in driving investment returns. Every basis point counts. And as we move through the second half of 2014, it appears current market conditions may be best engaged with a globally disciplined, multi-asset strategy that may enhance the odds of an investor meeting their individual goals.

Of course, next month we’ll be issuing our latest quarterly outlook update that elaborates on these and other market views for the remainder of 2014. Stay tuned to the Russell Blog for related posts from my colleagues next month.

© Russell Investments