January 2014 Economic Outlook

Greg_SweeneyRead our Economic Outlook, a monthly newsletter authored by Greg Sweeney, CFA, chief investment officer at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 28-year veteran of the Investment Management team.

 

Federal Reserve Monetary Policy

  • At the next Federal Reserve meeting on January 29, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed continues to indicate that rates will remain near these lows until 2015 or longer.

Inflation

  • The year-over-year consumer price index (CPI) released in December shows inflation at 1.2%. The next release is on January 16. It looks like it will remain at this level. If it moves in one direction or the other our estimate would be a notch lower to 1.1%.

Economic Activity

  • Fiscal year-end September 30 statements from the federal government showed total debt outstanding at $16.7 trillion. The Daily Treasury Statement from the U.S. Government on December 31, showed current debt at $17.3 trillion. This is a continuation of a theme from last month and a reminder that the debt limit debate will likely be a political topic this month. Increasing debt by $600 billion in the last three months (partly to pay back borrowing when the ceiling was reached before the end of September) is not a good sign of either economic conditions or the stewardship of Congress.
  • The economic impact of the Affordable Care Act has yet to be determined and will take time to reveal its full impact. Yes, the models used in political circles suggested everything will work out fine. However, we know that when the numerator (health care costs) are 17% of U.S. economy, a small change in the denominator will have a very large effect on the results making initial model results worthless.
  • Economic growth predictions for 2014 are as high as 4.2% and as low as 1%. We see real GDP in 2014 between 1.5 and 2%. Continued federal deficit spending could push this higher, but that is not a sustainable economic driver. We would rather see more people working and rising personal income be the economic growth drivers.

Fixed Income

  • The Fed announced tapering of its quantitative easing program would begin this month with a $10 billion reduction in the amount of bonds purchased in the open market. The interesting part about this announcement is the Fed’s data dependent indicators previously outlined as the basis to begin tapering do not appear to have been met. That suggests the tapering has begun for other reasons.
  • Ten-year Treasury bond yields are in the range of 3%. Longer term yields are expected to drift higher while short-term yields are expected to remain low. This means there is a delicate balance between going far enough out on the yield curve to capture some interest income without having maturities that are too long. Longer term bonds lose value faster in rising rate environments.
  • This approach worked well for us in the rising rate environment in 2013.

Stock Market

  • Stocks hover near their highs going into 2014. We remain cautious as top line corporate revenue growth remains muted. We believe more market attention will be on revenues, earnings and underlying economic conditions and less on the Fed’s quantitative easing program that has driven so many investors into the stock market in search of returns. We expect stock buy-backs to continue which will help corporations report growing earnings per share.
  • Predictions can be off the mark and last year was a good example of that as very few prognosticators expected 30% returns in the market for 2013. It is best to have a portfolio allocation that fits your own investment profile rather than to chase returns. Don’t be surprised if there is a 10% market correction in 2014.

View previous Economic Outlook newsletters.

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