Last year, the US economy and corporate earnings grew in low single digits. Yet, the stock market did very well, anticipating accelerating growth – something we normally see in the early stages of economic recovery after a recession. It is now four years after the 2007 -2008 recession was declared over. Price-to-earnings multiples have expanded and are now at historic averages. At some point, the perception of accelerating growth will not be enough to sustain equity markets. Actual growth will confirm last year’s market action and provide a basis for potential equity returns in 2014.
Last month, we had a weak employment report. The Bureau of Labor Statistics reported on January 10 that December nonfarm payrolls rose by only 74,000 when most economists were expecting numbers closer to 200,000. Reuters reported that mortgage applications at the end of 2013 were at their lowest level since 2000. There were many factors unique to 2013 that constrained growth. Taxes were increased at the beginning of the year. Dysfunction in Washington leading to a government shut down and uncertainty over the debt ceiling negotiations did not lead to business confidence and investment.
Yet, there are many reasons for optimism. The National Federation of Independent Business reported in December that small businesses are planning to increase worker compensation and to make capital expenditures. According to the Federal Reserve, household and corporate cash are near record levels. And Congress is addressing some of the blunt effects of the sequester, reducing fiscal drag. Thanks to the technological revolution in the energy industry, electricity rates in the US compare favorably internationally, offering a competitive advantage for manufacturing.
Uncertainties linger, however. Effects of the Affordable Care Act are only beginning to be felt. 2014 is an election year, so major structural issues will remain unresolved. Increased environmental and financial regulations will continue to filter through the economy. And distortions caused by the zero rate policy of the Federal Reserve will linger throughout the year. We probably still have a few years of deleveraging ahead of us, limiting the upside to growth.
LPL Financial Research forecasts economic growth to accelerate from 2% in recent years to 3% this year and for corporate earnings to grow 8 – 10%. If, indeed, higher growth materializes, last year’s equity performance will be justified, and it will provide a basis for further optimism. We have already seen increased volatility as the forces of slow growth compete with those of accelerating growth. We should be prepared to see periodic bouts of volatility until this debate is resolved.
John Hess 
Falgun Jariwala 
Managing Principal Managing Director
jhess@nsinvestors.com fjariwala@nsinvestors.com
www.nsinvestors.com www.nsinvestors.com
- The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. They are those of the authors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you consult your financial advisor.
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- All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.