by Chad Fraser, Investing Daily
Overall, 2013 was a strong year for stocks, with the Dow Jones Industrial Average gaining about 24% year-to-date, with the usual ups and downs along the way.
The government shutdown, which lasted from October 1 through 16, prompted one of the pullbacks. The Dow dropped nearly 6% from September 18, about two weeks before the Washington ground to a halt, to its lowest point on October 8. However, it has since rebounded and moved well past its September 18 level.
For much of the year, the market has been preoccupied with the Federal Reserve, specifically when and by how much it would curtail its $85-billion-a-month bond-buying program, known as quantitative easing (QE). The wait finally came to an end on December 18, when the Fed said it would reduce the stimulus measure by $10 billion a month, to $75 billion. The Dow and the S&P 500 hit new all-time highs in response.
Philip Springer, chief investment strategist for our Personal Finance newsletter, wrote in the wake of the decision,
“With the Fed’s long-awaited move, monetary policy should be relatively well set for at least most of 2014. Maybe investors can now move on to focus primarily on growth, earnings and valuations.”
With that in mind, and the new year upon us, it couldn’t be a better time to sit down with two of our Investing Daily editors — investment pros who spend every day poring over the numbers and uncovering winning stocks for their readers—to get a sense of what they see ahead. They’ve also supplied some of their favorite stocks for 2014.
Read on for their latest thoughts.
John Persinos, Editorial Director, Investing Daily and Personal Finance
“To be sure, stocks have enjoyed an outstanding year. These robust gains have prompted loud warnings from the chattering class about a stock ‘bubble.’ However, index price-to-earnings ratios and other valuation measures aren’t high enough to cause investor nosebleeds — not yet, anyway.”
“Ignore the braying of the media’s professional prophets of doom. They make their living by stirring up fear to boost ratings. The fact is, the economic headwinds are dissipating and the tailwinds are strengthening.”
Even so, with the bull market approaching its fifth year, investors should take extra care to mitigate their risk, says Persinos. However, this is far from a time for panic. (For some of Persinos’ portfolio management advice for 2014, see his recent Investing Daily article “New Year’s Resolutions for Investors.”)
Sectors He’s Watching:
One factor Persinos says should calm any nervous investor is continued good news from the U.S. manufacturing sector, which saw increased activity for the sixth straight month in November, according to the Institute for Supply Management.
He sees lots of other reasons to be bullish on the sector’s long-term prospects, as well, including the ongoing maturation of the manufacturing industry in developing countries. He says,
“The U.S. wage differential with manufacturing based in countries such as China is not as potent a force as it used to be, as a rising middle class in emerging markets demands a higher standard of living.”
Health care is another sector Persinos sees delivering gains for investors in 2014. He says,
“The U.S. health care industry is projected to generate total revenue this year of nearly $1.7 trillion, accounting for almost 18% of gross domestic product. An aging and sicker population, combined with the rollout of Obamacare, will continue to propel health care spending higher in 2014 and beyond.”
A good way for investors to capitalize is through large firms that can pour a lot of resources into developing leading-edge treatments. For Persinos, giant drug maker Johnson & Johnson (NYSE: JNJ) fills the prescription.
Johnson & Johnson has been dealing with a lot of bad press lately, including a $2.5-billion plan to settle lawsuits involving a defective all-metal hip device. It also agreed to pay $2.2 billion in relation to allegations that it used illegal marketing practices to push certain antipsychotic and heart treatments.
But these troubles — which have barely affected the company’s share price — won’t have much bearing on its long-term prospects, according to Persinos.
“The company every year spends more than $3 billion alone on R&D. As Johnson & Johnson’s legal woes recede, this R&D will continue to position the company to benefit from rising rates of chronic disease around the world.”
Stocks He Likes:
Jim Fink, Senior Editor of Investing Daily and Chief Investment Strategist for Jim Fink’s Options for Income and Roadrunner Stocks
“The U.S. economy is set to go into overdrive in 2014 for the first above-trend year of economic growth (3%-plus) since 2007. Fourth-quarter U.S. GDP was up a very strong 4.1%. The global economy appears to be stabilizing and even strengthening on average. China has “turned a corner” with fears of a real-estate-fueled recession quickly receding.”
“Europe is finally emerging from recession, with its two largest economies, Germany and France, growing by a robust 0.7% and 0.5%, respectively, from the first quarter to the second. It was France’s biggest quarterly increase in more than two years. England’s economy is growing faster than expected, and its services sector recently hit a 15-year high. The Eurozone is not recovering in a straight line, however, with third-quarter GDP numbers falling back a bit—France and Italy’s economies both dropped 0.1%, but Germany continued to grow at a decelerating 0.3%.”
“The U.S. Congress is showing increased signs of bipartisanship, reaching a two-year budget deal (first time since 1986) that in 2014 will cut in half the fiscal drag on the economy previously scheduled by automatic budget cuts under sequestration. The Federal Reserve’s December 18 decision to finally begin tapering its $85 billion-per-month quantitative easing program is partly a reaction to the budget deal and the Fed’s increased confidence that the economy is doing better. Long-term interest rates should rise modestly next year, but not too much, since short-term rates remain anchored at zero until at least 2015.”
“Higher long-term rates in developed markets (the U.S., Western Europe and Japan) combined with a peak in large-cap corporate profit margins may slow S&P 500 returns to a single-digit gain 2014 after two double-digit years in 2012 and 2013, but four factors will keep the market aloft: (1) stronger earnings; (2) the end of the “fear trade,” resulting in retail investors rotating out of fixed income and into stocks; (3) increased M&A activity (after two down years in 2012 and 2013), as companies gain confidence in the recovery and stop hoarding cash; and (4) low energy prices (thanks to the U.S. fracking revolution) boosting consumer spending.”
“2014 will be the second year of the presidential cycle, which is historically the weakest of the four-year term—up on average only 4.0% since 1901. Combine that with the fact that the first year of the presidential cycle (2013) was positive, and the average return of the second year is even weaker (only 2.4%). In addition, except for the Internet bubble between 1995 and 1999, over the past 40 years, the stock market has never risen in the year after a 20% up year (like 2013) if the year prior to the 20% up year was also strong (like 2012).”
Sectors He’s Watching
“2014 should be the year for: (1) U.S.-led developed-markets outperformance; (2) economically sensitive industry sectors, such as industrial capital goods, technology, real estate and retail; and (3) small cap stocks, which outperform during accelerating economic growth.”
“Emerging markets may have a more difficult time with rising interest rates, given their dependence on capital inflows and commodity exports, as well as the continued economic slowdown in China, a large importer of emerging-market goods.”
Stocks He Likes: