James Paulsen's Outlook for 2014, without further comment:
We are pleased to bring you the latest edition of Economic and Market Perspective, written by James Paulsen, Ph.D., Wells Capital Management’s chief investment strategist. In this edition, Jim offers his analyses of current economic trends. For mobile users, we have included the first paragraph of the latest piece:
The new year will certainly be characterized by the Federal Reserve finally backing off from its full throttle approach toward the monetary accelerator. However, we also suspect U.S. and global economic growth will quicken more than most anticipate. Stronger economic growth combined with a further tightening in the resource markets (i.e., expect the unemployment rate to decline toward 6% by year-end and for the factory utilization rate to rise above 80% during the year) may lead to a modest rise in the U.S. inflation rate and produce the first “inflation scare/overheat/can the Fed exit fast enough” panic of the recovery. Consequently, the methodical and well-controlled monetary tapering which greets us here at the beginning of the year may turn to a “panic taper” as the year progresses wreaking havoc again in the bond market, creating a volatile but essentially flat stock market and perhaps producing solid returns for commodity investors.
Here are the highlights:
Could U.S. Nominal GDP Growth Approach 6%?
In the U.S., we expect both real GDP growth and price inflation to accelerate this year. Real GDP growth should reach about 3.5% in 2014. Combined with a rise in the rate of GDP deflator index inflation to about 2.5%, the pace of nominal economic growth may prove the strongest of the recovery close to 6%. Several positive forces should help lift economic growth.
Controlled Taper to a “Panic” Taper?
We believe a mini-”inflation/overheat can the Fed exit fast enough” panic will likely come to dominate the 2014 economic and financial market climate. If, overheat fears do eventually grip mindsets, what is now a well-controlled, methodical monetary tapering may quickly become a panic tapering.
Good Year for Commodities?
Among the three major asset classes (stocks, bonds, and commodities), commodities may provide the best investment results in 2014.
Why a Weak U.S. Dollar?
Most expect the U.S. dollar to strengthen as the Fed begins tapering its QE (quantitative easing) program. For several reasons, we suspect the U.S. dollar will surprisingly weaken this year.
Another Year of REPRICING the Bond Market!?
Throughout this recovery, bond yields have been distorted by persistent Armageddon fears and because of the unprecedented quantitative easing policy enacted by the Federal Reserve. Both have kept yields below normal equilibrium levels which would more appropriately reflect a sustainable economic recovery. Last year, however, the bond market began to normalize because the consensus economic outlook finally “gave up the Armageddon ghost.”
Stock Market Turbulence in 2014 .... But
Long-Term Bull Still has More Left!?! We expect a volatile but essentially flat year for stocks in 2014, but also believe the bull market is likely to last several more years.
Longer-Term Stock Market Potential Still Significant?!?
Most importantly, investors should avoid getting too cute attempting to time the volatility this year less they miss what will likely prove only a pause in an ongoing bull market during the next several years. If inflation spirals out of control (not our forecast), the Fed and bond vigilantes would aggressively increase interest rates and prematurely abort both the recovery and the stock market run. However, should inflation remain reasonably contained (e.g., the annual inflation rate remains 4% or less), the economic recovery will most likely last several more years, and while certainly not a straight line, the ultimate peak of the contemporary stock market bull should prove considerably higher.
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