At this year’s halfway point, LPL Financial Research is pleased to offer the Mid-Year Outlook 2014: Investor’s Almanac Field Notes containing key observations and updates to their outlook for 2014. Similar to a farming almanac, LPL Financial Research’s Investor’s Almanac is a publication containing a guide to patterns, tendencies, and seasonal observations important to growing. The goal of farming is not merely to grow crops, but to sustain living things—investing shares the same goal.
LPL Financial Research’s mid-year outlook
As LPL Financial Research 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 LPL Financial Research’s mid-year outlook for the economy and markets. LPL Financial Research’s notes from the field contain these key observations and reaffirm their 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. LPL Financial Research continues 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.
- 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 LPL Financial Research’s 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 four of the past 10 quarters. Critical to LPL Financial Research’s mid-year outlook, earnings for S&P 500 Index 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. Yields are unattractive and gains are not likely in the second half. LPL Financial Research finds fewer sectors attractive than at the beginning of the year. LPL Financial Research expects 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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Mid-Year outlook points that possibility for economy and profits do not develop
The primary risk to LPL Financial Research’s mid-year outlook, the possibility that better growth in the economy and profits do 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.
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