Investment manager: 2014 forecast mostly upbeat

Doug May
Doug May

Phil Castle, The Business Times

Economic growth should continue through 2014 in the United States as consumer spending holds steady, unemployment rates decline and federal monetary intervention tapers off.

While a bull run that’s carried the stock market to record heights is expected to continue, it’s less likely investors will enjoy another year of double-digit returns, said Doug May, a regional manager for Avant-Garde Advisors in Grand Junction.

May detailed a mostly upbeat forecast for 2014 in the latest installment of his twice-a-year luncheon presentations.

The U.S. economy and markets have moved toward more normal conditions even as fears over impending crises have eased, May said. While there have been some concerns about the Federal Reserve scaling back monthly bond purchases intended to stimulate the economy, May said tapering actually constitutes good news in signalling an end to the need for such efforts.

Another question involves the position of the economy in the business cycle. While the upturn isn’t young, neither is it mature, May said. By one measure, the U.S. remains squarely in the middle of a global business cycle.

May bases his forecast in part on a proprietary leading economic index that tracks 10 indicators that include everything from corporate profits and factory orders to small business expectations and global shipping activity. The latest index reading forecasts strong growth with eight components advancing, he said. “The growth we see is legitimate, and we can go forward. And that makes me optimistic.”

May projects annual growth in gross domestic product, the broad measure of goods and services produced in the country, of 2.5 percent during 2014. Consumer spending and business investments will bolster growth, he said.

May expects the U.S. unemployment rate to continue to retreat, slipping to 6.2 percent. While the jobless rate has declined in part because fewer people are working or looking for work, actual job growth also will play a role, he said. “It will come down because of hiring, and that will be a very welcome change.”

While May anticipates that stock prices will continue to rise in 2014, it’s unlikely the trend will match what was in 2013 a 30 percent increase in the broad Standard & Poor’s Index of 500 stocks or a 27 percent gain in the Dow Jones Industrial Average of 30 blue chip stocks.

“We’re not in the situation of last year, not even close,” he said.

  From a historical perspective, the S&P 500 has posted an annual gain of 30 percent or more 18 times since 1926, May said. The following year, the market surged 30 percent or more three times and increased 5 percent or more 11 times, he said.

By one measure, the S&P 500 could rise 5 percent in 2014 and the Dow Jones Industrial average 29 percent, May said. But actual gains likely will come in somewhere in between, he added.

May projects the technology sector to offer the best opportunity for market growth  in 2014, while he expects the utility sector to fare the worst.

Short-term interest rates will remain near record lows in 2014 because that’s what the Federal Reserve has announced as its intentions, May said.

Long-term interest rates increased from around 3 percent to 4 percent during 2013 and could increase another point in 2014, May said. While low interest rates made bonds a losing investment proposition in 2013, higher rates could make bonds more attractive in 2014, he said.