“Oh, The Places We’ll Go!”

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By Jeremy Office Special to The Pineapple As the year comes to an end, we reflect on where we’ve been, where we are, and where we may be going. Since we take a top-down macro approach to investing, we attempt to make educated decisions on what could be the dominant themes for 2014. Because we do not have a crystal ball, we try to be broad in our overall expectations and base our assumptions on historical statistics, fundamental analysis of economics and personal experience. After many hours of research and debate among our team, we have come up with the following themes for 2014 and the possible implications associated with them. Going through this exercise reminded me of one of my favorite books, Oh, The Places You’ll Go by Dr. Seuss. This book has been a backdrop throughout my life, so I thought it would be fitting to explore the places we think the markets will take us in 2014. As the great Dr. Seuss said, “Congratulations! Today is your day. You’re off to Great Places! You’re off and away!” As we saw in May 2013, the mere hint of tapering for the first time pushed rates higher from a low of around 1.63% to above 2%. To much of everyone’s surprise, in December we actually achieved $10 billion of monthly reduced purchases. The FOMC also anticipates that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the 2% goal. With Janet Yellen at the helm, we expect an accommodative monetary policy to continue, with rates drifting higher as additional tapering becomes imminent. Tapering will not only test the resiliency of the markets, but will also indicate that in the eyes of the Fed, the economy has substantially improved—an encouraging nod that investors might be looking for to regain confidence. In late 2012 and early 2013, Japan entered into uncharted territory and took a page out of the Fed’s book by adopting an extremely accommodative monetary policy to overcome its stagnant economy. “Abenomics,” named after Prime Minister Shinzo Abe’s economic policies to encourage growth and private investment, is beginning to show signs that it is working. The CPI rose 1.1% year-over-year in October, marking the first time in five years that the CPI has remained above 1% in two consecutive months. Japan’s manufacturing PMI rose to 55.1, a new cycle high, and small business sentiment rose to near 20-year highs. Japan’s November M2 monetary base grew by 4.3% year-over- year, the fastest pace seen since February 1998, and we’ve continued to see weakening of the yen against the dollar. We believe that Japan will remain on its current trajectory and that Japan will be willing and ready to implement further stimulus as we saw in December, an additional $53 billion to offset the planned increase in the national sales tax. Will the Eurozone catch up with the rest of the developed markets? We saw meaningful progress out of the Eurozone in 2013 and believe that it will provide a positive economic backdrop in 2014. The Eurozone exited the recession in the second quarter, with gross domestic product expanding by 0.3% from the first three months of the year. European economies are in an early cycle recovery and valuations are still relatively inexpensive when compared to developed markets. The Eurozone’s flash composite PMI climbed to a three-month high of 52.1 in December from 51.7 in November. The key to Eurozone success will hinge on getting all members of the 17-country currency bloc to synchronize growth. As there continues to be a divergence between the Eurozone’s biggest economies, France and Germany, we believe that policymakers need to increase their stimulus and that monetary policy will remain accommodative for 2014. China was under the microscope for much of 2013 and we anticipate them to be under the same scrutiny in 2014. Their explosive credit growth and shadow banking undermined the future of China’s growth potential and fueled fears of a softening economy. Analysts expect the world’s second largest economy to slow to anywhere from 6.8% to 7.6% this year, which would be the weakest in 14 years. As U.S. and Eurozone economies improve, we expect export growth to pick up and support the deceleration in China. China continues to be one of the major influential uncertainties in 2014. Overall, we are expecting positive equity returns and continued challenges in fixed income for 2014. As the Fed weans the economy off of its stimulus, we will begin to see the resiliency of the markets and the true strength of the underlying economy. The Fed tapering, the Eurozone slipping back into recession, and a slowdown in China could derail the current recovery, but the return to normalcy and stabilization of markets support our positive view. Although we recognize the potential headwinds, we believe the tailwinds outweigh them, and as economies begin to show life again, a renewed vote of confidence could be what spurs investors to invest back into the markets. We may not see the type of returns we saw in 2013, but the underlying fundamentals are improving and we are expecting an acceleration of global economic growth that should bode well for capital markets in 2014. Jeremy Office, Ph.D, CFP, CIMA, MBA is Principal at Maclendon Wealth Management in Delray Beach and specializes in portfolio construction, strategic asset and liability management, and long term planning relating to financial matters as well as real estate, income tax, insurance and estate planning. He is also Managing Partner of SJO Worldwide a venture capital company. www.maclendon.com • 855.MAC.WEALTH