Often our greatest worries turn out to be the least of our concerns.
So it goes each year in the financial markets.
- At the end of 2010, investors worried about QE2 causing inflation. Looking back now, inflation has been the least of our problems.
- In 2011 and early 2012, many analysts touted the “end of the euro.” Yet again, today, the euro has strengthened relative to other major currencies and the prospects for a return to economic growth in the euro area have materialized in recent months.
- And heading into 2013 the US “fiscal cliff” garnered all the attention. Commentators warned that this federal fiscal nightmare would send the US economy into a new recession. But—and by now you’ve guessed it—that did not turn out to be the real story for the year. In fact, not only did the US economy avoid a recession, economic growth picked up somewhat over the course of the year and the market realized that the US central bank would “taper” the pace of its asset purchases. This spooked bond investors and sent interest rates higher around the globe.
The big concern for 2014? As I write this letter, “tapering” still takes top billing. The lessons learned from 30 years with global financial markets at Payden & Rygel suggest to us that while today’s focus may be on reduced Fed asset purchases, the real story lies elsewhere. We find it difficult to believe that a central bank’s reduction in monthly bond purchases by $10 or $20 billion is enough to derail a $15 trillion economy.
For our part, we expect 2014 to bring better economic growth, low inflation and unemployment levels above the historic norm. The Fed is likely to continue its commitment to near zero overnight rates until the US unemployment rate falls closer to 5.5%. In this environment, without a recession, Treasury yields may rise, but corporate credit (both investment grade and high yield) should fare well and US equities, while not repeating 2013’s stellar performance, should continue to rise.
In the meantime, we will wait to see what surprises 2014 brings and focus on what we can control: our relentless focus on diversification, liquidity and attentiveness to each client’s individual needs.
Our best wishes for the holiday season and the coming year.