In 2014…

In 2014, Investment portfolios are likely to be less dependent on Government policies and national budget spending fiascoes as compared with 2013. In the year ahead, there are good reasons to believe that things will go back to normal for the US economy for the following reasons:

5 Reasons why in 2014 things will go back to normal

1) The risk of a government shutdown, debt ceiling battles and a budget crisis are fairly low, and for the first time in 4 years, Congress approved a $1.1 Trillion budget for the remainder of 2014.

2) Since 2014 is a midterm election year, lawmakers will most likely be on their “best behavior” as compared with Obama’s administration rocky first term.

3) The Fed, under the leadership of Yelen, will continue the tapering of its bond purchase program (QE3), signaling less monetary involvement in the economic process.

4) Europe will emerge from the recent economic crisis, and China and Japan will gain momentum and improve their GDP.

5) The strengthening economy and the reduction of government “drag” on the economy will bolster investor confidence in the reliability and sustainability of the bullish stock market.

All these factors will contribute to a favorable outlook for the investment community and to the continuation of the bullish stock market during 2014.

Key components of the 2014 forecast

1) Stronger economic growth will likely boost the US GDP growth rate to more than 3%, after three years of anemic GDP growth of less than 2%. Many of the factors that weighed heavily on the economy during the past 3 years, including the hikes in US taxes, the sequestration and budget cuts, and the economic slowdown in Europe will fade away, removing the clouds of doubts for investors, and accelerating the rate of hiring, capital investments and mergers and acquisitions of American companies.

2) The stock market may produce a total return in the low double digits (10%-15%). This growth rate prediction is based on an improved economic outlook for S&P 500 companies that forecast growth rate in the 5%-10% range for 2014, and on a relatively moderate stocks PE ratio of 16-16.5. This PE ratio leaves room for further growth in the equity market and is below the historically high PE ratio levels of 18-20 that historically triggers stock sell offs.

3) The bond market will most likely remain flat as interest rates will begin ascending to a level of 3%-3.5% for 10-year T-bills.

 Therefore…

In summary, as the economic conditions improve it is likely for the equity market to reach new highs, the GDP to increase to a 3% level, the interest rate to move up a notch, and the bond market to marginally improve. It is quite possible for the DJIA to reach the 17,000 mark and for the S&P 500 to exceed the 2,000 mark at the end of 2014. An investment mix of 60% in US equity, 20% in bonds and 20% in emerging markets might yield an overall return of 10% or better for 2014.

Obviously, this is not a bulletproof forecast and unforeseeable external factors could certainly disturb it. Such factors might include regional conflicts in the Middle East and Far East, environmental disasters around the globe and political instabilities in rouge nations around the world.