We know you don’t make forecasts, but what is your perspective for investment in 2014?

It’s complicated. I’m a bit more cautious, but also optimistic. There are some major problems out there, for which there seem to be no satisfactory solutions, but they seem to be manageable, and over time, markets tend to climb a wall of worries. Investors need to be more selective this year, but there are good opportunities.

What is your macroeconomic outlook?

GDP was reported at 4.1% for the 3rd quarter for 2013. My perspective is that the U.S. economy is not as fragile as some believe and with the E.U. coming out its downturn, corporate profit growth may be more robust than is generally expected. The private sector is growing nicely and the Fed has begun to taper its asset purchase program that many have been counting on to support the economy, but is no longer needed.

Will the Fed continue its QE programs under the new Chairman Janet Yellen?

We have had the most dovish Fed in history, supplying liquidity starting at the time of the financial crisis, and continuing over the last five years. It’s a good thing that the Fed is starting to cut back on its unprecedented quantitative easing programs, and it is generally expected that they will fully end this program in 2014.

But can the economy continue to grow as the Fed begins to taper its quantitative easing support?

Absolutely. Corporations and investors will breathe a collective sigh of relief to finally be rid of the financial repression that the Fed’s various QE programs have created in the marketplace. And the economy can resume its growth path without the cloud of uncertainty that the Fed has created by its policies. As employment continues to grow consumers will continue to be strong contributors to growth and we should also see more of a step-up in business capital spending. 

With the market close to record highs, some are calling for a major correction. Do you think stocks look overvalued at current levels?

The market is not as undervalued as it was a year ago, but there are still stocks in every industry sector that are fairly valued based on expected earnings. Estimates for S&P 500 earnings for this year should support the present level and higher stock prices. Valuations are not historically extended. Of course, a correction can happen at any time, for any reason, and we haven’t had a correction of 10% or more since May of 2012. It’s more important to focus on fundamentals than trying to guess the next move in the market.

Are you concerned about bonds with the prospect for higher interest rates?

With interest rates at historic lows, bond prices are vulnerable to price risk whenever interest rates rise prior to maturity. That said, bonds have a place in some portfolios to offset volatility in other asset classes, but they offer very low returns.

Beyond traditional stocks and bonds, how are you allocating assets in client portfolios?

It all depends on their objectives, time horizons and ability to live with the inherent volatility in markets. I believe that diversification into other asset classes makes sense for a lot of investors. I would discuss with them the merits of investing in MLPs, real estate, private equity, and equities in international markets.

Any final thoughts?

As always, it is critical that investors learn to live with short-term volatility and take a long-term view toward their investment portfolios.

Thanks, Dave


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