Navigating the Markets

Compass Changes

• No changes.

Investment Takeaways

• Although the S&P 500 has achieved our total return forecast for 2014 (10 – 15% gains), we continue to favor U.S. stocks through year end with support from continued steady earnings growth.*
• We favor U.S. stocks over their foreign counterparts due primarily to lackluster growth and structural impediments in Europe. We would like to see technicals improve to become more positive on EM.
• We view energy as an intriguing buy-the-dip opportunity following crude oil’s bear market decline.
• A lower than benchmark weighting to bonds may be appropriate, as the yield does not compensate investors for the interest rate risk.
• The growth scare has faded, but slowing growth in Europe, a strong U.S. dollar, and decelerating inflation may support bonds over the near term.
• Strong earnings, low defaults, and now more attractive valuations should help support high-yield bonds, though heavy new issuance prevented the sector from reaching new highs.
• From a technical perspective, the S&P 500 remains above its 200-day simple moving average and at new all-time highs, which suggests the long-term trend remains bullish.

Please click here for the full Portfolio Compass publication.

*As noted in our Outlook 2014: The Investor’s Almanac, the stock market may produce a total return in the low double digits (10-15%). This gain is derived from earnings per share (EPS) for S&P 500 companies growing 5-10% and a rise in the price-to-earnings ratio (PE) of about half a point from just under 16 to 16.5, leaving more room to grow. The PE gain is due to increased confidence in improved growth allowing the ratio to slowly move toward the higher levels that marked the end of every bull market since World War II (WWII).