A Look Ahead at 2014

By Russ Koesterich, CFA, Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

As we head into 2014, it’s time for my annual look forward.

So what am I calling for in 2014?  I’m sticking with many of the same themes as last year, with a couple of critical tweaks.

From an Economic Perspective: From an economic perspective, I expect growth to pick up modestly, both in the United States and globally. In 2014, I expect the U.S. economy will edge past the 2% growth rate of the past couple of years and come in around 2.5% to 2.75%. Global growth should accelerate from 3% in 2013 to around 3.5% next year. Despite somewhat faster growth, 2014 is likely to be another year of low inflation in most developed countries.

Although the Federal Reserve (Fed) has begun its long awaited taper, policy remains accommodative and supportive of the economy. Stronger household balance sheets also represent a tailwind.

I also expect an increase in real interest rates thanks to slightly better growth, though the Fed likely keeping the fed funds rate close to zero throughout 2014 should keep the rate rise modest. I would look for an increase of around 0.5% for the 10-year Treasury over the course of next year.

From an Investment Perspective: Against this economic backdrop, I continue to advocate that investors overweight stocks in their portfolios. Equities may not be as inexpensive as they were a year ago, but they remain more attractive than bonds and cash. That said, I do expect more market volatility next year, and I believe that investors should be selective within equity markets. In particular, I think international stocks and emerging market equities are worth investor attention, as they both appear more reasonably priced than U.S. equities.

Meanwhile, there are few bargains in fixed income markets. With rates likely to rise and inflation still low, I still advocate underweighting long-dated Treasuries and Treasury Inflation Protected Securities (TIPS), and sticking instead with fixed income credit sectors, including high yield bonds. Additionally, I continue to believe that muni bonds look attractive.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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