Mixed Data Means Christmas Rally, Not Fed Taper

This article was written with Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with minyanville.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

Although some asset purchase tapering could occur in 2014, this author expects the Fed will maintain its current expansive monetary policy steps.

Economic data continues to be mixed, with preliminary Q3 GDP growing much faster than forecasted, but small business sentiment is falling again. These figures, along with other recent data, support my view that global growth will remain tepid and that 2014 will resemble this year in many ways; US politics, monetary policy, and most significantly, the investment landscape will all resemble what we’ve experienced in 2013.

Contrary to popular thinking, I do not believe the Federal Reserve will change monetary policy in 2014. While US and global economic growth should continue to improve, it will do so at the same slow pace as over the past two years.

Within the United States, I expect official unemployment figures to drift below 7%, mostly as a result of a reduction in the labor participation rate and increased part-time employment, but also due to actual employment gains on the heels of increased manufacturing activity.

Unfortunately, the greatest risk to our economic recovery remains dysfunction in Washington, DC – something Fed officials are very aware of and worried about. Ongoing partisan politics will likely cause further uncertainty in the early part of the year as the debt ceiling debate is reignited.

As these events unfold, market participants will likely take a similar view as they did last October, viewing the dysfunction and related economic damage as a signal that the Fed will not be able to taper after all. Lastly, I believe that the housing market will continue to improve, however I do expect a leveling off in price appreciation.

Although some asset purchase tapering could occur, the Fed will maintain its current expansive monetary policy steps. While political pressure will drive incoming Chairwomen Janet Yellen to alter policy slightly, weak economic data and political turmoil will keep most of the current extraordinary policy steps in place.

As long as global growth remains below its long-term average of 4%, central banks around the world, including the Federal Reserve, will continue to be more concerned about deflation than inflation. Cyclical stocks should be beneficiaries of this environment. Separately, in spite of continued anticipation of “the great rotation out of bonds,” investors will likely remain committed to the asset class, even if there is a pickup in volatility for bonds. By reducing their bond portfolio’s duration and average maturity, investors will continue to benefit from the diversification bonds offer. In my view, the iShares Short-Term High Yield ETF (NYSEARCA:SHYG) is a good choice heading into 2014.

With regards to stocks, I expect companies with above category-average revenue growth to be among the best performers.

Heading into 2014, I still favor the food and beverage sector — well represented in the Power Shares Food & Beverage Sector ETF (NYSEARCA:PBJ); consumer discretionary companies represented by the SPDR International Consumer Discretionary ETF (NYSEARCA:IPD); large-cap multinational pharmaceutical companies represented by the SPDR International Pharmaceutical ETF (NYSEARCA:IRY); and the transportation sector, best represented by the iShares Transportation ETF (NYSEARCA:IYT). Some of my firm’s favorite stocks in our Revenue Buster Portfolio include the following: Bed Bath & Beyond (NASDAQ:BBBY), Sysco Corp. (NYSE:SYY), and Visa (NYSE:V).

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