Morningstar.com readers are expecting a positive, though not huge, gain from stocks following their dizzying ascent in 2013. They're less impressed with bonds' prospects, however: The average respondent to my recent query in Morningstar's Market Insights forum anticipated just a tiny positive gain from the beleaguered asset class this year.
Those were the results of Morningstar.com's second annual reader poll, conducted informally by me on Morningstar.com's Discuss forums. In the interest of fun (and in full recognition of the fact that it's next to impossible to predict the market's short-term direction), I asked Morningstar.com readers to break out their crystal balls and make their best guess about how the S&P 500 and the Barclays Aggregate Bond Index would perform in 2014. Readers complied, sharing their forecasts and their rationales. As of the afternoon of Jan. 2, the mean S&P 500 forecast was about 6.5%, while bonds were clinging to positive territory--but just barely.
When we conducted this same exercise at the outset of 2013, readers undershot the equity market's return, with the average forecast calling for a 9.3% gain for the S&P 500 versus its actual return of more than 30%. (For those scoring at home, RetiredinFL came closest to predicting the market's actual return last year, forecasting a gain of 21.3%.) And while few were excited about the bond market's prospects at the outset of last year, in hindsight respondents were too optimistic. They forecast a 3.7% return from the Barclays Aggregate in 2013, whereas the index actually lost about 2%. Only a handful of respondents--including PlantTheSeeds--allowed for the possibility that bonds would end up in the red this past year.
To read the complete thread or go on record with your own forecast for the coming year, click here.
'Most Investors Will Be Disappointed in 2014'
Several respondents said they expect stocks to follow up their strong returns in 2013 with muted gains or even losses this year.
Evolence's 4.3% forecast is slightly below the median forecast in the thread. The reason? "Reversion to the mean. Stocks go up two thirds of the time, and we've had two solid years."
Sagebasics is on the same page, but expects the reversion to be even more jarring, forecasting an 8% loss for the S&P this year. "After the strong equity rally in 2013, I think most investors will be disappointed in 2014," this poster wrote.
OceanMinded, forecasting an S&P 500 loss of 7%, expects that the pain won't be evenly distributed. "I think it will be a disappointing year for stocks, especially for higher-income sectors/stocks (utilities, telecom and mortgage REITs) and some of the higher-momentum names (social media, biotech etc). A bit contrarian, but my guess is that the basic material sector outperforms all others," this poster wrote.
C F S also expects the market's gains to be dispersed. "The energy and health care sectors will outperform, with the precious metals having another difficult year," this investor predicted.
Rich valuations mean that selectivity will count, in the eyes of DaveCFA82, and that the market's newly arrived could get shaken up in a hurry: "My own bottom-up research tells me that it's becoming much more difficult to obtain a margin of safety in many securities, as absolute valuations appear to fully incorporate a fairly optimistic tone and sustainability of profitable growth, so I'm becoming much more picky in what I own/buy and am holding a sizeable portion in cash (~20%), despite how ridiculous this may look as most investors get suckered into equities based on relative comparisons and short-term momentum. Investing (prudently) is at its hardest when it appears to be easy to most investors..."
Indeed, several respondents said that they expect stocks' trajectory to be bumpy in the year ahead. Capecod, for example, expects stocks to gain as much as 16% before leveling off to a 6% gain at year-end.
Billgorn, forecasting a return of 6% or 7%, thinks the drop-off will happen at midyear. "I think that this crazy momentum-driven market will continue to go up, to a high at about May/June then it will drop and end the year below that midyear high. Fear is mightier than greed, and if nothing untoward happens, then the 'sell in May' syndrome will be what takes the market down."
DBSMichigan also sees market momentum slowing midway through the year. "In the U.S., I expect a continued momentum rally in the first quarter, then a modest correction around the usual 'sell in May' time frame as economic progress underperforms wishful-thinking expectations (I believe Bob Johnson's outlook). It might start to look like 2011. Not sure how long this funk will persist; [stocks] could dip 10-20%. Then [I'm] expecting a turn-up before year end, particularly if congressional election results encourage optimism and capital spending."
'Counting on Growth for Increased Gain'
For armagh36, forecasting a 6% S&P 500 return in a "C+ year," the key swing factor in 2014 will be growth rates: Will they increase to justify higher valuations? "Stocks remain very close to their fair value, which results in counting on growth for increased gain. Low to moderate growth will be the key factor in 2014; in a sense, the difference between being sound and being robust."
Sutter agrees that economic growth will be the big determinant of market performance, setting ranges for forecasts accordingly. "The S&P will depend on the economy." If GDP grows more than 3%, this poster reckons that the S&P will return 5% to 7%. But if growth is more tepid than that, this investor's forecast for stocks drops to 2% or possibly into negative territory.
For homebrewer, economic growth faces significant headwinds, including a "tapering" housing market, slower growth in auto sales, and a dearth of high-paying jobs being added to the economy. "If things don't tank, then [stocks will return] 4% to 6%," this poster wrote.
But others are more sanguine on the growth question. BMWLover opined, "I'm probably going to be overly optimistic, but with economic conditions improving, lower unemployment, and better consumer confidence, I'm expecting the S&P 500 to end the year in the area of 2100, or a 14%-15% increase. We'll also see international equities increase as well, with emerging markets posting 20%+ gains."
Juris2 also thinks the economy has legs, writing, "I expect real growth in GDP of 2.5% to 3% in 2014 (3.5% rate by Q4), and a decline in unemployment rate to 6% by year-end with sustained job creation. Barring political catastrophe in U.S. or abroad, this should allow the 2013 equity market gains to consolidate, with some momentum for expanded returns in 2014. To pull numbers out of the air for 2014: S&P 500 [up] 9%; extended market [up] 12%."
C F S, meanwhile, believes that momentum will carry stocks to a gain of 12.34% in 2014. "Based on my crystal-balling, expect money markets and bond funds to continue their outflow, with the money moving into equities. This will help the Dow, the Nasdaq, and the S&P 500 Indexes."
'The Easy Money in the Bond Market Has Been Made'
Readers were decidedly less optimistic about the fixed-income market. Sagebasics pronounced, "The 31-year bond market rally is over. Interest rates will rise in 2014, but not substantially. The Barclays Aggregate Bond Index should decline in the neighborhood of 2%."
Rllucky agreed that bonds' glory days are over. "Interest rates are so low and they will either stay flat or more likely will be heading higher; therefore, the easy money in the bond market has been made," this poster wrote.
Also expecting a repeat of the Barcap's weak 2013 showing is Juris2, who's downplaying rate-sensitive bonds for that reason. "[I h]ave put some of my portfolio ballast or 'slow' money into stable value funds and will do more of that in 2014."
Festus is anticipating that bonds will tread water in 2014. "Bonds will continue to be a safe haven without adding money to the bottom line," this poster wrote.
Uysses is of a similar mind, expecting a flat return for the Barclays Aggregate as rising yields (an estimated 50 basis points) help offset capital losses on the bonds themselves.
OceanMinded is anticipating a small but positive (1%) return for the Barclays Aggregate Bond Index but thinks that long-duration bonds will be the hardest hit. "Rates will slowly creep up as tapering continues," this poster wrote. "Longer-duration bonds will get whacked, but the aggregate bond index remains in positive territory by year-end."
But audreyh1 thinks the short end of the curve is at greater risk. This poster didn't hazard a guess about the market's direction next year, but noted, "I think the shorter-duration bonds are more likely to get whacked--well at least a bit. Longer-duration [bonds] already have mild tapering baked in."
Evolence guessed that the Barclays Aggregate would return 1.8% this year, and agreed with audreyh1 that bonds are already factoring in the Fed's anticipated pullback on its bond-buying program. "Raising rates will be a headwind, but a lot of that is already priced in," this poster wrote.
'All the Reliability of a Magic 8 Ball'
No discussion about predictions would be complete without some posters warning of the folly of the whole exercise. Of the market's future direction, yogiman replied sagely, "No one knows."
Meanwhile, seh1981 quipped that the market's return would be "somewhere between -25% and 25%."
Carrie predicted that the market would end down a few percentage points with a lot of volatility along the way, but cautioned that the forecast was "[o]ffered up with all the reliability of a Magic 8 Ball. Reply hazy try again. Ask again later."
And monkeys256000 noted that if anyone does manage to hit the forecast on the head, it will be dumb luck. "Just like the professionals, some of us will get lucky and our predictions will make us look like a genius. I will stay diversified and invested for the long term."
Sagebasics agreed: "Don't focus on one year alone. Invest for the long term."
Meanwhile, JBP57 urged all stock investors to not forget how lucky they've been already. "Let's drink a toast to 2013, the year that Mr. Market was quite good to us......CHEERS!!!" this poster wrote on New Year's Eve.
Finally, in a must-read post, timbo11 warned against the folly of trying to guess the market's direction and urged investors to focus on their real advantages. "Patience is the primary and unassailable tactical advantage. (I have observed most professional investors complain about the negative impact of client impatience.) Be ready when opportunity knocks (it usually knocks once)," this poster advised. "Finally, understand yourself, bury your emotions, do not chase growth, do not ignore your investment positions. 99% of the media noise is wrong for you. You cannot plan to beat the market indexes, so accept reasonable investments at low expense rates and safe liquidity."