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3 risks you need to respect in 2014


The hottest story in town this year has nothing to do with the stock market and all to do with the weather. At least for now.

After delivering a blistering December and a torrid 2013, the stock market, just like the weather here in the U.S., is off to a frigid start and has investors questioning their convictions.

It’s a mindset that veteran investor and commentator David Kotok of Cumberland Advisors thinks is a mistake.

“We’re off to a cold start but I think we’re going to warm up a little bit,” Kotok says in the attached video. “I would be in this market. It is too soon to give up,” he adds.

That said, Kotok isn’t looking for a repeat of 2013, and forecasts a year of increased volatility and turnover and “high-single-digit” returns of 6-9% for the S&P 500 (^GSPC). But with economic worries minimized and political risks diminished, Kotok says he’s on watch for at least three other areas of danger this year.

1) Inflation Spike

Since this bull market began almost five years ago, inflation has been widely feared and talked about but statistically non-existent. But Kotok says if that were to suddenly change, and CPI were to “get hotter faster,” the Fed and its new chief could easily find itself “behind the eight ball.”

2) A World of Worry

Kotok also argues that substantial threats to our markets exists outside of our borders but that they’re largely “being ignored.” In citing “geopolitical risks”, Kotok is inferring that we should be thinking more big picture right now since things have stabilized enough domestically, that we have a gradual economic recovery in place, we know what to expect from the Fed, and election year dynamics should keep politicians on their best behavior.

3) Waning U.S. Influence Abroad

In a just-published interview with CNNMoney, the Eurasia Group raises the specter of “every nation for itself” as a result of the U.S. losing influence on the global stage. It’s a concern that Kotok not only agrees with, but one he says has already already hurt us several times, whether it’s revelation from former NSA analyst Edward Snowden, or reports of wiretapping allies, such as German Chancellor Angela Merkel.

Disclaimer: Merrill Lynch is not responsible for the editorial content of this program.

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