Against the Herd: Lower, Not Higher, Rates in 2014
At the start of 2010, it was well known that QE1 would be coming to a close in June. Yet, a "soft patch" in the economy sent stocks reeling for a 15%+ correction in the summertime. Then the U.S. stock market welcomed July's announcement of a second round of quantitative easing to commence in August ("QE2″). The news fueled stock gains throughout the second half of that year.
I am not "predicting" a first-half correction for stock assets in 2014. Nevertheless, if earnings guidance turns out to be weak, or if income ETFs continue to march higher on price gains, or if incoming jobs data are poor for several months, do not be shocked by any hesitation on the part of investors to purchase riskier assets on the dips.
Instead, lower stock prices combined with higher bond prices (lower bond yields) might force Chairwoman Janet Yellen to suspend a tapering increment; if a stock correction is severe enough, Yellen's colleagues may vote to increase its monthly bond purchasing activity.
Since I did begin this discussion with the average forecast for the 10-year yield at the close of 2014 (i.e., 3.41%), I will venture an educated guess on where it will finish. I expect a slight flattening of the yield curve to keep longer-dated Treasuries (e.g., 10-year, 30-year, etc.) in check, regardless of month-to-month volatility in lengthy maturities.
Couple a modest flattening of the yield curve with a historically probable shock to the "risk on" mentality, and I am offering 2.75% for the end of the year. In essence, I expect it to finish rather close to where it is right this minute.
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