The Dec. 18, 2013, issue of Capitalist Times Premium outlined our bullish outlook for the US economy and stock market. (See Buy the Dips: Our 2014 Market and Economic Outlook.)
We called for the US economy to strengthen throughout the year and gross domestic product (GDP) to grow by about 3 percent, a forecast that suggested investors should take advantage of dips in the broader market to buy cyclical names.
As for interest rates, we asserted that the Federal Reserve would scale back its extraordinarily accommodative policies at a gradual pace that wouldn’t upset the market.
In late 2013, many pundits argued that dividend-paying equities would underperform over the coming 12 months because of rising interest rates. But we crunched the numbers and concluded that increasing interest rates aren’t a legitimate reason to sell utility stocks, master limited partnerships and other income-oriented fare.
At first blush, our economic outlook appears too optimistic; the US economy likely will grow between 2.3 and 2.5 percent in 2014, shy of our 3 percent target.
But much of this shortfall reflects last winter’s harsh polar vortex, which kept consumers at home and depressed economic activity in the first quarter.
Although US GDP contracted by 2.1 percent in the first quarter, the economy expanded by a whopping 4.6 percent in the second quarter and 5 percent in the three months ended Sept. 30—the largest quarterly increase in more than a decade.
The economy’s robust recovery after the anomalous first quarter has helped to propel the S&P 500 to a roughly 15 percent gain. As we suggested, market corrections in February, May and October proved to be outstanding buying opportunities.
Our take on the Fed’s effort to normalize monetary policy and its implications for interest rates was also on the money. The central bank began to taper its monthly bond purchases in January and ended quantitative easing altogether in October. However, Fed Chairwoman Janet Yellen has signaled patience regarding the pace of any interest rate hikes in 2015.
The bond market surprised many forecasters in 2014: The yield on the 10-year US government bond has dropped to a low of 2.06 percent in mid-December from more than 3 percent in January.
Against this backdrop, our call that higher-yielding equity groups would do well in 2014 proved correct; in fact, the utility sector has delivered the best returns in the S&P 500, soaring by almost 28 percent.
Investors looking for in-depth coverage of this space should check out Conrad’s Utility Advisor; my colleague Roger Conrad has covered essential-services companies for almost three decades and has a long track record of picking high-yielding winners in this sector.
Although many of our predictions for 2014 panned out, we had our fair share of miscues.
A year ago, we asserted that energy and basic materials would outperform this year; however, the S&P 500 Basic Materials Sector Index has rallied by 6.3 percent thus far in 2014, while the plunge in oil prices has dragged the S&P 500 Energy Sector Index to a 9 percent loss.
Fortunately, strong stock selections bailed us out on our incorrect macro calls. Shares of aluminum smelter Century Aluminum (NSDQ: CENX), which we added the Wealth Builders Portfolio’s basic materials segment in March 2014, have gained more than 90 percent.