Outlook 2014: What To Expect In The New Year

Crystal BallEvery year the predictive powers of Wall Street are put on display for all to see. What follows is a wild mix of forecasts for the next year. Some are outlandish, others obvious, but another main theme plays out. Skepticism at the thought itself.

Should we be surprised? Not really. Much like baseball, batting .300 is a good year for forecasters. Far too often the focus turns to the one or two home runs they hit every year while ignoring all the strikeouts.

For me, it’s a way to test my understanding of what’s going on and have some fun in the process. That last part can’t be overstated enough. This exercise is meant to be fun first. Honestly, I just hope to do better than last year.

Call it what you will. Predictions. Best guesses, some more educated than others. It’s what I think will happen based on what I know now. Of course, rarely do things go as planned. There are always a few surprises. I don’t expect 2014 to disappoint either. With that, here’s my take on the next twelve months.


Investors can’t complain after the past two years. Yet, the economy hasn’t taken off like many expected. At some point more money needs to be spent on corporate growth and hiring. This is the year. Unemployment should drop further than this past year. But we’re still missing one key ingredient – wage growth.

That interest rate pop back in May had many concerned about how it would affect economic growth and home sales. So far, it hasn’t been nearly as bad as many thought. This economy can function with higher rates. However, another big jump in rates won’t go over so well. Expect a continued slow gradual increase for 2014.

Both banks and insurance companies will benefit from these rising rates. Your government bond funds won’t.

All of this is tied to the Fed and QE. The Taper finally happened! This isn’t a shocker. The market had expected it since last May. Basically, the Fed will spend less money buying government bonds and mortgage-backed securities, which lowers demand, lowers prices and raises interest rates. That will impact most interest bearing investments, with longer term government bonds, mortgages, and mortgage REITs affected the most.

Now the “When will QE end?” questions can begin. Don’t expect an answer until 2015.

Is anyone else tired of hearing about the debt ceiling? Me too! We’re not done yet. The debt ceiling will need to be dealt with again this Spring. If you think this will be a repeat of past debates, you’re probably right. Though, there is an ever so slight chance these folks learned from their past mistakes, work together, and get this done quickly. I won’t hold my breath.

But that’s not all. There are mid-term elections in 2014. Approval ratings are at all time lows. One third of the Senate and all the House are up for reelection. Time is ripe for a big shakeup.

Don’t expect double-digit S&P 500 returns like the past two years. Much of the past two years has been fueled by buybacks and cost cutting, with a little QE influence thrown in. Large cap companies are still flush with cash. Corporate earnings growth, in the natural sense, isn’t growing fast enough. At least, not as fast as stock prices. You remember the P/E ratio – price to earnings relationship. Well, something has to give. I say prices. The S&P is overdue for a 10% correction. I wouldn’t be surprised to see the S&P 500 break even or down slightly by December 2014.

Bottom line, if I had to choose an area to overweight my portfolio it wouldn’t be U.S. stocks or bonds. I’d be looking internationally.


I see emerging markets as the clear performance winner for 2014. The U.S. has done great. Europe as well. The emerging markets are due for a rebound after the pitiful showing in 2013.

Europe, by the way, is in the midst of its own growth story. Actually, I see Europe being where the U.S. was a year ago. There were still questions but all the right areas like unemployment and economic growth were improving. And just like the U.S., it’s happening slowly. European ETFs had a great 2013 with most stock funds falling in the 15% to 18% return range. I expect the European recovery to continue into 2014.


We’re not done hearing about bubbles by a long shot. It will only get worse before it gets better. The media will continue to ask, “Is there a bubble in fill in the blank“.

Since we’re on the topic of bubbles, here’s my best guess – peer-to-peer lending. The idea that any average joe out there can become a bank astounds me. Easier access to debt has presented a continuous cycle of bad economic results. Only here, there are no banks that need to be bailed out. Generally bubbles form out of the idea that something can’t lose. Peer to peer lending is slowly getting that moniker and it’s not true. Should you expect a peer-to-peer lending bubble in 2014? No, but I suspect the Lending Club IPO will be a telling point in the direction of peer-to-peer lending’s popularity. My fear – it goes mainstream and the herd follows.


The low-cost fund wars have pushed fund companies to offer smart beta products. Several were introduced in the last few years like low volatility funds, equal weighted funds, or fundamentally weighted funds. I’ve explained a few of these in the past already. Basically, it allows fund companies to build index funds that offer more safety, performance, or anything really, into a fund in exchange for higher fees. The rhetoric against managed mutual funds has been out for a while. It’ll be years before we know whether smart beta is actually smart. Until then, this is the direction the fund business is growing.


The finance industry is notorious for coming up with new, cool ways to take your money. Smart beta ETFs anyone. The process is simple. Find the top five most costly investor mistakes and build a service that feeds off all of them. Then rake in the dough, rinse, and repeat. Unfortunately, the finance industry is also notoriously slow when it comes to new technology. Bring on the startups.

I’ve been bombarded by email requests to feature several alternative brokers introduced in the past year that follow this line of thought. I refused simply because they don’t offer any benefit beyond what you find with a typical online broker. I suspect more will be introduced in 2014. The new alternatives that simplify, automate, and prevent, or at least limit investor mistakes, will succeed. The rest will fail. We’ll see many potential failures in 2014.

The second area for financial startups are portfolio management services. The software provides investment advice, based on your goals, across all your accounts. Several of these companies exist already that do a good job. More are coming. I’ll say this now, many will be touted as the best tools for your money. Most will fall short of what already exists. I’m all for a better, smarter way to manage investments. When I see it, you’ll know about it.

Social media is growing up. Facebook, Instagram, and Pinterest are popular, but Twitter has the most potential. Lets be honest here, Twitter is a nonstop live news feed that also lets you talk to anyone about anything with a hashtag. Don’t believe me? Here’s a question for the Twitter users. Of all the big events in 2013, how many did you find out about through Twitter? It was all Twitter for me. CNN and MSNBC were at least twenty minutes behind. Then there’s the hashtag phenomenon. Notice how TV shows have hashtags in the corner of the screen? That’s just the beginning. Of all the social media stocks, Twitter is the only one to watch in 2014.

The Bitcoin story isn’t over either. There won’t be a repeat of bitcoin’s astronomical price spike and recent fall. Rather, 2014 will be about the potential opportunities and threats this digital currency brings to several current business models and the startups around it. Think along the lines of lower transaction costs.


Remember, the best and brightest investment minds do this every year and fail miserably. Be realistic, don’t make any rash decisions and stick with your strategy.

If you enjoyed this article, get email updates (it's free).


    • Jon says

      They seem to be doing a good job even with the fund price wars. It’ll be interesting to see what they come up with this year! There’s a good chance I’ll cover it if/when anything new is introduced.

Leave a Reply