This is the time of year for New Year's resolutions, as well as when economists and analysts make predictions for the year to come.
As I've said in the past, I don't invest on the basis of grand predictions, however there are certain trends that have emerged that I feel are very important to successful investing in 2014.
Our team monitors markets closely but there is an important transition going on in the bond market and if you are unaware then you may be left with more risk in your portfolio than you wanted. In 2013 investors pulled more money out of bond mutual funds than ever before, totalling more than $70 billion. This is even more than in 1994, the last big year of outflows from the bond market. Back then, the U.S. Federal Reserve tightened monetary policy and raised interest rates, which caused the value of all bonds to fall and in return led investors to pull out their money.
A similar event happened last May when the Fed hinted at tapering their current stimulus program. Interest rates started to rise and bonds lost value, kickstarting major outflows. If the economy does indeed continue to improve it will not bode well for bond holders.
In short, this is a trend we expect to see continue, so investors need to recognize that government bonds and some bond funds may actually be a riskier investment for their portfolio than previously thought.
The Fed's criteria for ending QE (quantitative easing) is to see a substantial improvement in the labour market, which we have certainly witnessed in the past few months. As the job market continues to improve, we saw the Fed begin to reduce its QE program recently by $10 billion a month. This may cause more upward pressure on interest rates and downward pressure on bond prices moving into this year. It is difficult to say when the QE program will ultimately end but the recent reduction should be the start of a trend continuing into 2014.
Historically January is a big month for stocks, sometimes called "the January effect." Essentially there is a tendency for stock prices to rally in the first month of the year, the idea being that people are generally feeling more optimistic and the tax-loss selling (which typically happens in December) is over. Last January was impressive for stocks, but this theory isn't always the case; so we wouldn't suggest investing solely based on seasonal factors.
A repeat of the market increase in 2013 would require phenomenal economic growth, which sadly isn't probable. We are more likely to see a moderate return in 2014. In terms of a correction, it is definitely possible that we see some kind of a downturn as this is part of a healthy market. When it will happen is difficult to say, typically the period between April and October tends to see seasonally weaker months, but each year is different and you never know when a sell-off could occur. We are always prepared for this type of situation when managing our clients' portfolios and have a disciplined risk management strategy in place.
It is likely that the Fed will continue to taper and rates will eventually rise causing more money to flow out of bonds and bond mutual funds. If this is the case and cash flows back into the stock market, as it should, we could see another solid year for 2014.
Lori Pinkowski is a portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.
