Looking for the Corner of a Round Room: Our 2014 Economic Outlook

By Michael Hardy, CFA, SVP, Senior Wealth Investment Advisor/SPM, Bell State Bank & Trust

This past year we lost an icon of our firm, Mickey Snortland, and the many of us fortunate enough to know Mickey knew that he was committed to and passionate about people. Our company was founded by his father, Buck, in 1966, and since that time our owners have never wavered in their commitment to clients, employees and the broader community as their first priority. Why do we share this now? It seems fitting to start the New Year recognizing Mickey and reflecting on one of his often recited comments: “Do what is right for the client first, and the success of the organization will follow.” Said another way, it is not about the earnings; it is about the people. Take care of the people (clients, employees and the community), and the rest will take care of itself. 2013 was a testament to that value as our organization had its best year ever due to great clients and employees. In our Wealth Management Division, our assets under management/advisement exceeded $4 billion for the first time in our firm’s history. Words cannot adequately express our gratitude to our clients for making this achievement possible. Thank you! Mickey would have been proud to see the satisfaction of our clients and the happiness of our employees as we completed our best year in history.

As we look ahead to 2014, we expect continued economic growth with an eye squarely on the impact of the Federal Reserve’s actions to reduce its quantitative easing program. This program was a massive experiment, one in which the markets have no historical reference to base expected outcomes upon as the Fed withdraws from the program. If the economy can achieve escape velocity and sustain growth greater than 3% while the Fed extracts itself, we are positioned for a good year in the equity markets. Should the economy wobble and stumble as interest rates drift higher and borrowing costs increase, we would expect to see uncertainty return with muted price appreciation in the markets. In either case, we anticipate an upward bias in interest rates resulting in minimal returns for fixed income.

Speaking of commitment to our clients, by now some of you reading this article already will have attended one of our 2014 Economic Outlooks held across North Dakota, Minnesota, Arizona and Idaho. For the past 13 years, we have taken our annual Economic Outlook directly to our clients and prospects to share our vision for the future and how we anticipate navigating the market environment. For those who were not able to join us this year, we would like to provide the following summary.

Each year we choose a theme that suits the environment and investors’ concerns. This year’s theme was “Looking for the Corner of a Round Room.” Over the past several years, we have witnessed massive intervention by the world’s central banks to provide stimulus to a global economy recovering from the Great Recession. As a result of this intervention, interest rates were pushed to historic low levels, and stock market values reached all-time highs. This is where it becomes hard to find the corner in the round room as investment options — choices that investors can make with confidence — become difficult to identify and implement. The global economy is coming back from the world’s financial crisis and resulting recession. The U.S. Federal Reserve Bank has started to slow down its stimulus programs, and interest rates have begun their climb from historic lows. We know that when interest rates go higher, bond values go lower. When interest rates go higher for the right reasons, meaning stronger economic growth, the stock market also can go higher; but if interest rates go higher at a time when the economy is not strong enough to support higher rates, stock values come under pressure. Therein lies the current dilemma. Fixed income investors will continue to find it challenging to achieve any meaningful return, while equity investors are faced with record market levels at a time when interest rates are rising in a slow growth economy, thereby setting the stage for single digit returns with increased volatility in 2014.

Economic data generally has been positive, with unemployment trending lower at 7%, its lowest level since 2008. Third-quarter economic growth exceeded expectations at 3.6%, and fourth quarter is estimated to improve to 4.1%. Earnings growth slowed over 2013 but still provided record earnings for the market. Household net worth reached record levels, exceeding the previous high set in 2007 by 12% and up 38% following the housing and market collapse in 2008. However, as is always the case, headwinds will be blowing against these favorable conditions, and they include embarrassing federal politics, confusion over taxes and regulations, surging healthcare costs, lack of consumer income growth, a declining percentage of the population working and federal debt that continues to spiral out of control. We discussed each of these in detail at our recent Economic Outlook events.

To address this challenging environment, we have reached for additional tools from the tool box including increasing use of dynamic asset allocation strategies, determining additional opportunistic positions, incorporating passive index-based allocations where appropriate, increasing exposure to active duration management and favoring credit exposure over duration exposure to fine-tune yield while still maintaining a balance in our disciplined approach to manage risk and reward.

Thank you for the great year. We know that our success is a result of meeting our clients’ needs and expectations through the trust and confidence you place in us. We are committed stewards of our clients’ assets, with our clients’ success as our ultimate goal. Here’s to another successful, happy and healthy New Year!

Michael_HardyIf you’d like to talk more about investment scenario planning, call Michael Hardy to start the conversation.

701-451-3008
800-709-5781

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