Some observers fret over a potential stock market bubble, a steep market correction and uncertainty as the Federal Reserve tapers its monthly bond purchases.
Not the folks at Bank of America: Their outlook sees 2014 as a quieter version of 2013, with commodity prices still struggling, the U.S. dollar showing strength, the global economy expanding – and the bull market in stocks taking indexes higher. Here are their 10 big-picture ideas for next year.
1. S&P 500 rises to 2000 by the end of 2014, the gains driven by a 7 per cent rise in earnings, higher sales and more share buybacks.
2. Economic growth accelerates. Expect the U.S. economy to grow 2.6 per cent in 2014, European growth should come in at about 0.8 per cent and Japan will expand by 2 per cent. Chinese growth will slow to 7.6 per cent from 7.7 per cent, but that's good enough to lead emerging market economies.
3. Emerging markets will rebound modestly, after flat-lined growth since 2007. Expect overall growth of 4.9 per cent.
4. U.S. interest rates will rise. Expect the yield on the 10-year U.S. Treasury bond to reach 3.75 per cent, up from a high of 3 per cent in 2013. Rising rates will support the U.S. dollar.
5. Rising rates will bring a challenging year for fixed income. Strategists favour corporate bonds over government bonds. High-yield bonds offer the best potential, with a total return of 4 to 5 per cent.
6. Global inflation will remain stable, at about 3 per cent – although emerging markets will see inflation rise to 5.3 per cent from 4.7 per cent.
7. Ongoing recovery in the U.S. housing market will boost real estate values by 5 per cent.
8. Commodities will be weighed down by oversupply issues and a stronger U.S. dollar – particularly gold, oil and grain. Zinc, platinum and industrial metals will do better.
9. More rotation – and not just into stocks and out of bonds, but a broader "rotational shift" in markets: Real estate outperforms commodities, developed markets outperform emerging markets, small cap outperforms large cap, high yield bonds outperform investment grade bonds, and cyclicals outperform defensives.
10. And even more rotation, but the other way. Institutional investors such as insurers, sovereign wealth funds, central banks and U.S. pension funds will sell stocks and buy bonds.