What Is the Consensus for 2014?
"The only thing people are worried about is that no one is worried about anything.... That isn't a real worry."
-- Adam Parker, chief U.S. strategist at Morgan Stanley
Virtually all strategists are now self-confident bulls, as gloom-and-doom forecasts have all but disappeared. After more than a year with no reactions of 10% or more, any future setbacks are being viewed by the consensus as "bumps in the road" and as opportunities to buy because (after the correction(s)) we will be "up up and away."
After missing the 25% rise in P/E ratios in 2013, the consensus also assumes that valuations will expand again in 2014. (Note: The average P/E ratio has increased by about 2% per year over the last 25 years.)
The domestic economy has forward momentum and global purchasing manager indices were relatively strong in December, so the extrapolation of heady growth is now in full force by the consensus.In terms of the markets, the consensus remains of the view that liquidity (albeit, at a slowing rate as of this month) will overcome complacency again as it did last year, but my surprises incorporate the notion that the extremes that exist today (in price and bullish sentiment) put the markets in a different and less secure starting point in 2014. As we enter 2014, investors and strategists are again grouped in a narrow consensus and expect a sweet spot of global economic corporate profit growth that will translate to higher stock prices. The consensus is for U.S. economic growth of +2.5% to +3.25% real GDP, bond yields to be 25 basis points-75 basis points higher and year-end 2014 closing stock market price targets to be up by about +8% to +10% (on average). Indeed, most strategists suggest (in sharp contrast to their views 12 months ago) that the big surprise for 2014 will be that there is upside to economic growth and stock market prices. (To illustrate, Harvard University's Martin Feldstein asks, "Do we have to worry about overheating [of the economy in 2014]?" in the Wall Street Journal. This year a consensus even exists as to what risks are in store for 2014. Most repeated surprises would be the failure of Abenomics; a slowdown in China's economic growth trajectory; and a U.S. economy that is either too cold (a recession), which would result in a disappointing profit picture, or too hot (3.5% or more real GDP growth), which would result in a rise in interest rates (and inflation) that would choke off growth and restrain valuations. Again, let's use Goldman Sachs' principal views of expected economic growth, corporate profits, inflation, interest rates and stock market performance as a proxy for the consensus:
- U.S. real GDP, which was +1.8% actual in 2013, +3.1% estimate for 2014;
- global real GDP, which was +2.8% actual in 2013, +3.6% estimate for 2014;
- S&P 500 EPS, which was $108 actual in 2013, $116 top-down estimate and $119 bottom-up estimate for 2014;
- year-end S&P 500 price target, which was 1848 actual in 2013, 1900 estimate for 2014;
- inflation/headline CPI, which was +1.5% actual in 2013, +1.5% estimate for 2014; and
- U.S 10-year Treasury yield, which was 2.75% actual in 2013, 3.25% estimate for 2014.
- Corporate profit margins (70% above historical averages) are stretched to 70-year highs, so earnings are exposed.
- Second-half 2013 strength in domestic economic growth has been boosted by nonrecurring inventory accumulation. Some more recent signs (e.g., automobile sales, retail spending and housing data) suggest a deceleration in growth may lie ahead.
- The baton exchange from Helicopter Ben to Whirlybird Janet could be unkind to the markets. On average, a change in the Fed chair has resulted in about a 7% drop in the major stock indices.
- Quantitative easing may not be a continued tailwind for stocks. As Peter Boockvar wrote, "QE doesn't create a safer world, it is just a temporary high and the danger always comes on the flip side as previously seen.... QE puts beer goggles on investors by creating a line of sight where everything looks good, but the Fed's current plan is to end it by year-end."
- Sentiment measures are elevated to historically bullish levels. This is seen not only in the disparity between bulls and bears (in the popular surveys) but also manifested in the third-highest margin debt to GDP in history.
- Valuations (P/E ratios) rose by nearly 25% in 2013 vs. only 2% annually since the late-1980s.
- The Shiller P/E ratio is at or near historic highs (excluding the bubble of the late-1990s).
- According to JPMorgan, the S&P 500 is now more expensive on a forward P/E basis than it was at its previous peak in October 2007.
- Interest rates might pose more of a threat than is generally viewed. The rose-colored glasses being worn by investors might be cleared in the year ahead, as the withdrawal from QE and low rates might be harsher.
- A year ago, market enthusiasm was muted. Today there are no cautionary forecasts for the S&P for the next 12 months.
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