2014 Outlook

One can never really put a fine point on the economic and market outlook, though that doesn't stop scores of strategists and many in the financial media from giving it a go, their dismal record (forecasting a gain of only 8.2 percent last year) notwithstanding.   For that matter, that never stopped me.  So...

Some things are clear enough.  Longer-term interest rates, which bottomed a few years ago, will be rising and the 10-year Treasury will approach a 3.5 percent yield, maybe even more, during the year.  Many bond prices already reflect expectations.  Short-term rates, near zero now, will remain there all year.  That means yields on money-market funds, CDs, T-bills and such will be virtually zero.  

Stocks will continue to transition from being undervalued five years ago to being fairly valued now en route to being significantly overvalued at some point.  The market doesn't spend much time at a fairly valued level.  Either it's in transition from being undervalued to overvalued, or the other way around.  We are in the former now.  One reason is that the global economic picture is gradually improving, especially here and in much of Europe.  Very accommodative central bank policies worldwide are paying off.  

Earnings have grown for a few years thanks primarily to share buybacks and financial engineering with interest-rates near zero.   But earnings growth ultimately depends on an increase in capital spending in a growing economy.  If investment comes along then GDP and earnings growth will accelerate and the estimated $120 for S&P operating earnings in 2014 will materialize and perhaps even be exceeded.  That would mean stocks are far from overvalued now and could become considerably undervalued as the year unfolds and investors look forward to more growth in 2015.  Fair value for the S&P is around 15 times earnings, which is where stocks are now.  Bull markets never end when stocks reach fair value, however.  Investors always overshoot and at the end stocks become truly overvalued.   They always overshoot on the down side as well, as we saw in 2009.

Stock market history shows that after surges similar to the one in 2013 the subsequent year is usually a good one. I expect that to be the case in 2014.  In spite of the shaky start to the year, most expect an 8 to 10 percent return.  I can't disagree.

 — David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

 

Christmas 'Presents'

Christmas is over but investors, including most of my clients, received a few presents recently.  I'm referring to dividend boosts.  General Electric raised its quarterly dividend to 22 cents and Pfizer raised its to 26 cents.  AT&T, the highest yielding stock in the Dow, just raised its dividend for the 29th consecutive year.  MDU Resources, one of my favorite stocks, increased its dividend for the 23rd year.  There are many more examples.  

 

Historically, dividends account for 43 percent of the stock market's long-term annual return of around 10 percent.  With stocks up close to 30 percent this year, it's easy to make a case that dividends will become a more important component in total return as we move forward.

 

Dividend paying stocks are easy to own.  Most are from companies that are financially stable and mature, and they are typically less volatile that other stocks.  Shareholders can either enjoy the periodic dividends or have them reinvested. 

 

Investors can own their favorite dividend-paying companies or buy a dividend ETF.  Here are two of the latter to consider:  The SPDR S&P Dividend ETF (SDY) holds 60 companies from the S&P 1500 that have raised their dividends annually for at least 20 years.  Its expense ratio is 0.35%.  An alternative is ProShares S&P 500 Aristocrat (NOBL), which holds S&P 500 stocks that have increased dividends annually for at least 25 years.

 

With few exceptions all of my stock holdings have above-average dividend yields and nearly all raise their  payouts year after year.  Dividends provide more than just walking around money.  Over time dividends account for close to half of the market's total return.  When you own several of these companies, you'll be receiving dividend "presents" again and again.

— David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.