By Hal M. Bundrick for MainStreet
NEW YORK (MainStreet) Witha more than 25% return in the S&P 500 for the year to date, and in spite of the prospect of the Federal Reserve ultimately reducing its economy bolstering bond buying program, market strategists are upbeat in their forecasts for the remainder of the year and into 2014.
"We believe the economy is set to accelerate in the fourth quarter, similar to the last three years," says investment manager Elaine Garzarelli, president of Garzarelli Capital. "In the 1995 government shutdown, consumer activity recovered quickly. Interestingly, the shutdown has helped by delaying (Federal Reserve bond purchase) tapering."
Garzarelli says the yield curve indicator, a key factor in her monetary indicator composite, has been bullish since October 2008.
"We are just not seeing the inverted yield curve that would give us any cause for alarm," Garzarelli says. An inverted yield curve is when short-term interest rates are higher than long-term rates. "Historically, an inverted yield curve has appeared before severe market corrections or bear markets. But we are seeing no evidence of this happening any time soon."
In fact, Garzarelli believes interest rates are pointing to a strong stock market.
"A bullish signal for this indicator is when the fed funds rate is 200 basis points or more below the 10-year bond rate," she says. "Currently, the 10-year bond yield is at 2.50%, and the Fed funds rate is 0.09% a spread of 241 basis points, which is extremely bullish."
Synchronized global growth
Strategists at Russell investments are also optimistic, favoring stocks over fixed income investments, as they remain moderately positive on global equity markets.
"As we look toward 2014 we're forecasting synchronized growth across the U.S., Japan and Europe for the first time since 2010," says Andrew Pease, global head of investment strategy at Russell. "We also see a strengthening low-inflation recovery that favors equities over bonds, despite relatively full equity market valuations."
Russell analysts continue to favor European over U.S. equities, and they feel emerging market equities look increasingly positive -- possibly offering double-digit earnings growth in 2014.
"Though we're considerably less bullish long-term than earlier in the year, we still prefer U.S. equities over fixed income," says Doug Gordon, senior investment strategist for North America at Russell. "Improving growth prospects reinforce our strategy to use market pullbacks as buying opportunities."
Fixed income forecast
Meanwhile, emerging market debt and U.S. corporate bonds are expected to lead fixed income investments all the way through 2018, though asset returns are likely to be below historical averages over the next five years, according to Standish Mellon Asset Management, the fixed income arm of BNY Mellon.
Rising rates are expected to be the main drag on fixed income returns, according to Standish, which expects the Fed to begin raising short-term interest rates by mid 2015.
"Our analysis suggests that the federal funds rate will increase from between 0% and 0.25% today to 3% by the end of 2018, with the two-year U.S. Treasury mirroring this rise," says Thomas Higgins, chief economist and global macro strategist for Standish. "This would lead to relatively unattractive returns for Treasuries, when compared with emerging market debt, corporate bonds, and other fixed income segments."
--Written by Hal M. Bundrick