January 08, 2014 | By Scott Minerd, Global CIO
U.S. equities rose by 10 percent in the final three months of 2013, producing a wealth effect that should pay dividends in 2014. Although the unwinding of inventory that built up in the third quarter is expected to be a drag on fourth quarter economic growth, consensus estimates for fourth quarter GDP growth have risen recently to 2 percent. Improving economic performance should translate into greater confidence, making investors comfortable with more risk, suggesting strong U.S. stock market performance in the coming months.
This cycle is now mature, but expansions do not die of old age. Instead, recessions are generally sparked by an exogenous event or a policy mistake. With little expectation that the Federal Reserve will raise interest rates before 2015, the expansion could continue for several more years. Even when the Fed does eventually hike rates, it typically takes another two years before the economy tips into recession.
The upper limit for 10-year U.S. Treasury yields in the coming months should be around 3.4 percent. With long-term yields rising faster than short-term yields, the yield curve has steepened over the past month and now appears consistent with the better economic momentum we’re seeing in the United States.
The environment for corporate credit feels similar to 2004 – 2005, when interest rates rose modestly, but credit spreads continued to contract, leaving absolute yields relatively flat. If that trend repeats itself this year, then there should be continued opportunities in spread products.
The start of the New Year appears to be a great time for investors, who should take advantage of opportunities presented over the next three to six months.
Major advanced economies (with the notable exception of Japan) should in 2014 have significantly less fiscal policy drag on growth. Leading the way is the United States, where sequester-mandated budget cuts will decrease and the effects of higher payroll taxes should diminish. The euro zone should also benefit as budgetary austerity fades. Britain should also have a slightly smaller fiscal drag. Overall it’s a rosier picture for global growth in 2014, as economies around the world should benefit from faster growth, especially since demand is improving in advanced economies that make up over 40 percent of global GDP.
Source: Haver Analytics, IMF, Guggenheim Investments. Data as of 1/8/2014.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
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VIDEOS & PODCASTS
Scott Minerd, Chairman of Investments and Guggenheim Partners Global CIO, joins Bloomberg TV on Fed Day to discuss the Federal Reserve’s largest rate hike since 1994.
Managing Director Justin Takata discusses the technical and fundamental drivers of value in investment grade corporates, and U.S. Economist Matt Bush addresses recession timing and the possible progression of policy.
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