Argus Research is forecasting 11%-to-14% total return on the S&P 500 for 2014, implying that the S&P 500 will reach the 2,040-2,115 level this year, with a single-point forecast of 2,075. We believe the global economy is entering a phase of actual economic expansion, after an uneven period in which stop-and-start recovery has alternated with regional recessions.
The main fear gnawing at investors, particularly those late to the party, is that this bull market may be largely spent. For many investors, last year's 30%-plus total return looks like the capper on a very nice run. For the past 50 years, bull markets have averaged 54-month duration; this one is approaching 60 months old. For the S&P 500 to surpass 2,000 this year, many things need to fall into place, including 3%-plus global GDP growth, ongoing earnings momentum from corporate USA, a linear trend in interest rates, and the absence of the policy and socio-economic disruptions that have hamstrung the world economy since the great recession..
Argus Chief Investment Strategist Peter Canelo points out that what economists have called steady recovery since mid-2009 has actually been punctuated by recessionary or slow-to-no grow in significant regions. India, for instance, has been a weight on overall Asian growth for most of the past three years. The eurozone was in recession for six quarters, spanning late 2011 through early 2013, before growing 0.3% in 2Q13.
We recently shared our 2014 U.S. GDP growth forecast of 3.2%. Looking at the domestic economy, Argus President and Economist John Eade believes that the consumer and exports will be positive to GDP in 2014. Technology spending and possibly capital spending could soften this year relative to 2013. But after three years of decline, government spending could stabilize in 2014 and represent a more typical 20% of "core" demand, up from the 18.5% area in recent years.
The Conference Board recently forecast that real (inflation-adjusted) global GDP growth would expand from 2.8% in 2013 to 3.1% in 2014. Key components of the Conference Board's forecast include expansion in mature economy growth to 1.7%, from 1.0% in 2013; and emerging economy growth of 4.6% in 2014, down from 4.7% in 2013. With all due respect to the Conference Board, we could be entering a phase of somewhat stronger global economic expansion. For most of the past year, our economic enthusiasm has been based around the U.S. consumer - partly because the rest of the global economy has been thin and uneven.
But the latest overseas data has been more positive. Markit Economics and JP Morgan publish a Global Manufacturing & Services PMI (Purchasing Managers Index) summary, a diffusion index in which readings above 50 signal expansion. The December Global PMI index showed output of 54.0 and new orders of 54.8. Aggregate (as opposed to composite) seasonal adjustors can skew these numbers. Still, these are positive indicators of global economic expansion.
We were particularly encouraged by the latest U.S. trade deficit report (released 1/7/14) and what it says about our trading partners. The November 2013 trade deficit of $34.3 billion represented a more than four-year low. Imports declined 1.4% in the month as crude oil imports reached their lowest level in three years. But what really caught our attention was the 0.9% rise in exports to a record $194.9 billion. Exports to China in November were the highest on record. Exports growth was led by commercial aircraft and by finished commodities such as chemicals.
Argus President and Economist John Eade is expecting interest rates to rise in 2014, as the Federal Reserve more forcefully tapers quantitative easing. Last year, investor unfamiliarity and uncertainty around tapering caused the long yield to lurch first upward, from May to September, and then downward in October after the Fed postponed QE. Argus expects the trend in interest rates to be more linear in 2014 than in 2013, because the trajectory of tapering is better understood. Argus is forecasting that the 10-year Treasury yield will average 3.5% in 2013. We look for the long yield to range from 2.75% to 3.5% across the first half of the year and from 3.5% to 4.0% across the second half, potentially ending the year near 4.0%.
The U.S. dollar initially surged in mid-2013 on the perception that tapering, and rising rates thereafter, would reverse long-standing dollar weakness. But Chief Investment Strategist Canelo expects the dollar to remain weak against currencies of fiscally more prudent trading partners in Canada, northern Europe, and northern Asia.
The combination of rising global demand and dollar weakness should be positive this year for commodities, which underperformed in 2013. So far, actual commodity prices (as measured by the CRB index) have moved up only modestly from 2013's lows reached in mid-November on tapering prospects. Investors appear to be anticipating a better trend in the commodities space. For example, the XME Metals SPDR had a stronger fourth-quarter performance than almost any sector SPDR.
Finally, we are not ready to forecast peace and harmony in Washington, DC. While the partisan divide is as intense as ever - witness the politically charged votes for the new Fed Chairperson - the number of touchstone issues is diminished this year relative to 2013. Early in December, the two parties jointly unveiled a two-year budget agreement that will prevent a shutdown similar to that in October. While the next debt ceiling deadline looms for late February or early March, both sides promise to abstain from 11th hour theatrics. We cannot of course predict the next global crisis. But the market showed in 2013 that big global events (i.e., the Syrian chemical attacks) provided lots of sound and fury but little lasting impact on the market.
We are modeling 9%-10% growth in S&P 500 earnings from continuing operations for 2014, after two straight years of roughly 5% growth. Our model assumes a broadening in the economic recovery in the global economy and a switch-over from recovery to expansion in the United States. Ongoing EPS growth is essential to preventing valuations from becoming too stretched and the stock market too pricey. We expect the S&P 500 to surpass 2,000 and perhaps 2,100 during 2014 and finish the year within a few percentage points of those highs.