Here is a summary of the market update released today from the research department of our broker/dealer, LPL Financial.
As we expected, markets in 2014 have been less influenced by politics and policymakers than in 2013 and more dependent upon growth. Growth is an essential characteristic of all living things, and in 2014, growth is vital to our outlook for the economy and markets. Our notes from the field contain these key observations and reaffirm our forecasts:
After an extreme winter weather-induced slowdown in the first quarter, the U.S. economy began to thaw with the warmer temperatures in the spring. We continue to believe U.S. economic growth is on track to accelerate by about 1% over last year, owing to the return of business spending and the elimination of the drag from fiscal policy. As a result, the Federal Reserve (Fed) is likely to continue to taper its bond purchases and end its bond-buying program in the fall, leaving rate hikes on the calendar for some time next year.
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Stocks spent the winter months dormant, but emerged in the spring rising to new highs and producing a gain of about 6% by early June—halfway to our target range of 10–15% for the full-year of 2014.* Historically, double-digit gains are typical for years in the middle stage of the economic cycle. The current mid-cycle environment has even produced double-digit gains in 4 of the past 10 quarters. Critical to our outlook, earnings growth for S&P 500 companies are on track for 5–10% growth—with 6% achieved in the relatively weak first quarter. Confidence in the durability of growth may contribute to a slight rise in valuations and, along with earnings growth, may potentially generate a low double-digit gain for stocks in 2014.
Opportunities in the bond market have become scarce. Current yields are unattractive and gains are not likely in the second half. We find fewer sectors attractive than at the beginning of the year. We expect yields to rise in the second half of 2014 as global growth strengthens and inflation picks up from the low point in the first half.
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The primary risk to our outlook, the possibility that better growth in the economy and profits does not develop, has gained even sharper focus as we move from the threshold of the new year into the midst of 2014. That risk is likely to be more significant in the second half of the year than the distractions posed by the end of the Fed's bond-buying program and the mid-term elections.
* 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).
Click here to download the LPL Financial 2014 mid-year market update:
