Green Book January 2014
Our expectations for 2014 on the economy, corporate profits and stock market leadership. We update the historical relationship between stock and bond returns: we expect stocks to outperform bonds going forward. Our domestic industry group selection model outperformed the S&P in 2013; what groups look appealing in 2014? Revisiting the “Bridesmaid” Strategy at both the asset class and equity sector levels. Emerging markets: what worked, what didn’t, and what you need to consider before investing in them. Small Caps are selling at a 21% valuation premium relative to Large Caps- is this sustainable? Outlook for rates - is 3% the upper bound for the 10-year?
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Featured Articles
The 2014 Outlook: More Volatility, But Ultimately An Up Year
Gains will likely be modest, and secondary stocks could finish the year flat-to-down. The year will likely be marred by a moderate to severe mid-year correction, and Small Caps could easily suffer a 20% hit during that swoon.
Exploring The Historical Relationship Between Stock And Bond Returns: An Update
We were surprised to see that all differentials ten years and longer are still below their respective 1926-to-date medians, indicating they still have the potential to keep moving towards historical median levels. We expect stocks to outperform bonds going forward.
2014 Time Cycle—Lower Your Expectations & Be Patient
It’s time to update our time cycle composites, and what they say for equities in the U.S., U.K., Germany and Japan and long-term interest rates and credit spreads in the U.S.
Group Scores Worked Well In 2013, What We Like For 2014
All five factor categories did well, and the best performing Attractive industries came from six different sectors and ranged from traditionally defensive to more cyclical groups.
January Anomalies Revisited
The January Small Cap bounce effect ain’t what it used to be, but extrapolating the month’s market action for the next eleven months is a “less bad” idea than any other time of the year.
Buy The Bridesmaid, Not The One Looking To Rebound
The investment leadership of a given year has historically had better-than-even odds of outperforming in the following year at both the asset class and equity sector levels.
Emerging Markets: Dismal 2013, Hopeful 2014
What worked, what didn’t; what you need to consider for investing in Emerging Markets this year.
Small/Mid/Large Caps
Small Cap Premium Continues Upward To 21%. The red-hot equity market of 2013 was especially good for Small Caps with a +38.8% total return.
A Shift In Fund Flow Trends Holds Through Latter Half Of 2013
Both equity and bond categories set all-time nominal net cash flow records.
A Taper & Hibernating Bears
The rise in interest rates after the taper was on the back of low liquidity around the holidays. 3% is a pretty strong upper bound for the 10-year, and a failure to stay above this level will probably see a re- test of the 275 level in the near term.
Table of Contents
Stock Market
- The 2014 Outlook: More Volatility, But Ultimately An Up Year
- The Economy In 2014: Solid But Unspectacular
- Corporate Profits In 2014
- Stock Market Leadership In 2014: Large Caps, Tech, Health Care
- Commodities In 2014: Supply Remains A Concern
- January Anomalies Revisited
- Buy The Bridesmaid, Not The One Looking To Rebound
- The Dreams & Nightmares Of 2013
- Emerging Markets: Dismal 2013, Hopeful 2014
Of Special Interest
Macro Monitor
- A Taper & Hibernating Bears
- 2014 Time Cycle—Lower Your Expectations & Be Patient
- RAI Edges Lower, Stays On “Lower Risk” Signal
- U.S. Bonds
Equity Strategies
Quant
- 2013 Factor Performance Review
- Correlations Staying Steady
- Sector Performance – Finding Discrepancies
Market Internals
- Earnings Momentum
- Small/Mid/Large Caps
- Growth/Value/Cyclicals
- S&P 500: Equal Weighted Index Better in 2013
Portfolios
- Core & Global Portfolios Equity Exposure Maintained In December
- Long Only Portfolios Finish 2013 Strong
- Short Portfolios: Both Portfolios Outperform Benchmarks
Major Trend
Fund Flow Trends
Estimating the Downside
Appendix
The 2014 Outlook: More Volatility, But Ultimately An Up Year
Gains will likely be modest, and secondary stocks could finish the year flat-to-down. The year will likely be marred by a moderate to severe mid-year correction, and Small Caps could easily suffer a 20% hit during that swoon.
Exploring The Historical Relationship Between Stock And Bond Returns: An Update
We were surprised to see that all differentials ten years and longer are still below their respective 1926-to-date medians, indicating they still have the potential to keep moving towards historical median levels. We expect stocks to outperform bonds going forward.
2014 Time Cycle—Lower Your Expectations & Be Patient
It’s time to update our time cycle composites, and what they say for equities in the U.S., U.K., Germany and Japan and long-term interest rates and credit spreads in the U.S.
Group Scores Worked Well In 2013, What We Like For 2014
All five factor categories did well, and the best performing Attractive industries came from six different sectors and ranged from traditionally defensive to more cyclical groups.
January Anomalies Revisited
The January Small Cap bounce effect ain’t what it used to be, but extrapolating the month’s market action for the next eleven months is a “less bad” idea than any other time of the year.
Buy The Bridesmaid, Not The One Looking To Rebound
The investment leadership of a given year has historically had better-than-even odds of outperforming in the following year at both the asset class and equity sector levels.
Emerging Markets: Dismal 2013, Hopeful 2014
What worked, what didn’t; what you need to consider for investing in Emerging Markets this year.
Small/Mid/Large Caps
Small Cap Premium Continues Upward To 21%. The red-hot equity market of 2013 was especially good for Small Caps with a +38.8% total return.
A Shift In Fund Flow Trends Holds Through Latter Half Of 2013
Both equity and bond categories set all-time nominal net cash flow records.
A Taper & Hibernating Bears
The rise in interest rates after the taper was on the back of low liquidity around the holidays. 3% is a pretty strong upper bound for the 10-year, and a failure to stay above this level will probably see a re- test of the 275 level in the near term.
Stock Market
- The 2014 Outlook: More Volatility, But Ultimately An Up Year
- The Economy In 2014: Solid But Unspectacular
- Corporate Profits In 2014
- Stock Market Leadership In 2014: Large Caps, Tech, Health Care
- Commodities In 2014: Supply Remains A Concern
- January Anomalies Revisited
- Buy The Bridesmaid, Not The One Looking To Rebound
- The Dreams & Nightmares Of 2013
- Emerging Markets: Dismal 2013, Hopeful 2014
Of Special Interest
Macro Monitor
- A Taper & Hibernating Bears
- 2014 Time Cycle—Lower Your Expectations & Be Patient
- RAI Edges Lower, Stays On “Lower Risk” Signal
- U.S. Bonds
Equity Strategies
Quant
- 2013 Factor Performance Review
- Correlations Staying Steady
- Sector Performance – Finding Discrepancies
Market Internals
- Earnings Momentum
- Small/Mid/Large Caps
- Growth/Value/Cyclicals
- S&P 500: Equal Weighted Index Better in 2013
Portfolios
- Core & Global Portfolios Equity Exposure Maintained In December
- Long Only Portfolios Finish 2013 Strong
- Short Portfolios: Both Portfolios Outperform Benchmarks
Major Trend
Fund Flow Trends
Estimating the Downside
Appendix
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