How far will U.S. equities run
Published on Jumat, 17 Januari 2014
15.04 //
Business News,
Market News,
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2013 has drawn to a close and it was one for the record books with the
best yearly stock returns in almost 15 years. While not as eventful as
previous years, there was still quite a bit of action from the first government shutdown
in over a decade to the start of Fed monetary policy tapering to the
re-emergence of the EU, not to mention the blistering U.S. equity rally.
How far will U.S. equities run in 2014 after their 31% gain last year?
Though those invested in U.S. equities surely had a stunning year, it
was by no means across the board and there were many ups and downs for
people diversified and invested in other assets. Here’s what made or
lost you money in 2013 and what 2014 may bring.
1. How far will U.S. equities run?
On the top of almost everyone’s mind is the U.S. equities market. Up
31%, it almost didn’t matter what you were in, small, mid, and large
caps all offered record-breaking returns. In comparison, even the
legendary market reversal of 2009 only offered a 26% yearly gain. One
would have to go back to 1997, the beginning of the late ‘90s bull
market to find a bigger return at 33%.
However, the strong rally has also made stocks considerably more
expensive. Though the question of the market being overvalued is the
topic of much debate, it is clear the market is no longer cheap.
Historical results say there’s no reason the market can’t rally further
but there lacks a compelling case for another equally strong rally based
on the fundamentals. Perhaps the best advice is making sure you
rebalance your portfolio to get U.S. equities back in proper allocation
and stay diversified.
2. Can hot sectors repeat?
While the entire U.S. corporate securities market was up aplenty, there
were specific asset groups that broke away from the average and
delivered even better returns. Consumer discretionary
XLY
+0.08%
, up 41%, health care
XLV
+0.25%
, up 39%, industrials
XLI
-0.04%
, up 38%, and financials
XLF
-0.23%
, up 33%, led the way for almost the entire year. Specific industries
like airlines jumped almost 100% and certain companies like Netflix
NFLX
+0.02%
ended up 300%.
Like the overall market, there’s little to suggest whether the future is
as bright as the past. Hedging bets by rebalancing allocation and
diversifying however is a smart and safe play.
3. Will underperformers rebound?
Of course where there are winners, there are also losers. While several
sectors underperformed the average, most returned decent results such as
energy and consumer staples at 23% and 22%. The exceptions are the
utilities sector
XLU
+0.69%
, up 8%, and property REITs
VNQ
-0.18%
, up 2.3%. Both these sectors are reliable income-paying assets but
lost ground as the Fed taper became a reality. REITs especially took
punishment, dropping 17% from May to June alone.
What is the 2014 outlook? Utilities remain high from a historical
valuation standpoint and their yield is no longer quite as attractive as
10-year bond yields reach 3%, comparable to XLU’s 3.8%. REITs still
face the rising-interest-rate problem but have reduced in valuation such
that they may present at least some short-term opportunities.
4. Are bonds a safe haven?
Bonds had a relatively dismal year in contrast to stocks. While Fed
stimulus and bond buying helped to push bond prices to record levels,
and yields to record lows, the Fed taper put an end to that quickly and
abruptly. From its high in May, the 7-10 Year Treasury ETF
IEF
+0.28%
dropped over 7% for a 2013 total return of -6.1%, huge compared to its
pitiful 1.7% yield. The broader bond market
AGG
-0.23%
suffered a similar if less dramatic drop, down approximately. 3% from
its peak in May for a 2013 total return of -2.1%, a large drop taking
into account the low 2.3% yield.
Moving forward to 2014, anticipation of Fed taper has already doubled
the 10-year Treasury yield, now at nearly 3%, giving bonds some
breathing room. In fact, some suspect the market has overreacted and
driven yields up a little bit too high too fast given the early state of
tapering. Regardless, bonds have finally come down from highs and are
now closer to historically normal prices. While longer-term interest rates
will still climb, threatening bond prices, for 2014 the immediate price
risks have subsided. The question for investors is whether the risk is
worth the rather measly 2-2.5% yield most bond funds are offering.
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