Scott Minerd (Guggenheim Partners CIO) on the outlook for 2014:
U.S. equities rose by 10 percent in the final three months of 2013, producing a wealth effect that should pay dividends in 2014. Although the unwinding of inventory that built up in the third quarter is expected to be a drag on fourth quarter economic growth, consensus estimates for fourth quarter GDP growth have risen recently to 2 percent. Improving economic performance should translate into greater confidence, making investors comfortable with more risk, suggesting strong U.S. stock market performance in the coming months.
This cycle is now mature, but expansions do not die of old age. Instead, recessions are generally sparked by an exogenous event or a policy mistake. With little expectation that the Federal Reserve will raise interest rates before 2015, the expansion could continue for several more years. Even when the Fed does eventually hike rates, it typically takes another two years before the economy tips into recession.
I see brand new animal spirits everywhere I look when I get off the desk. In the city, in the suburbs, on TV, in the newspapers. Are they really coming at the end of the cycle this time or is this still the middle? Minerd says the current environment feels like 2004-2005 from a corporate credit perspective – rates rising slightly but spreads tightening to offset it.
A Great Time for Investors (January 9th)