Yoshikami 2014 outlook: Don't expect another 2013
It's hard to believe that 2013 zipped by so quickly but here we are; the New Year is here. With 12 fresh months ahead many are wondering if 2014 will be as positive as 2013. I believe the short answer is 'no', but we do expect a reasonable year for select assets.
2013 was one of those crazy transitional years where the news was bad yet the market performance was good. This is always perplexing to investors as headline readers often assume that markets move in tandem with the news of the day. 2013 was a disjointed year but delivered solid returns for equity investors proving that headlines and returns do not always create a clear picture.
We believe 2014 will continue to be supportive for equity investments after a very robust 2013. Here are a few of the reasons why:
* There's nothing else that provides similar returns given current interest rate conditions.
* There are still billions of dollars floating in the economy from quantitative easing.
* The Federal Reserve is still buying massive amounts of bonds on a monthly basis which is supportive for economic activity.
* Monetary agencies around the world are attempting to stimulate their economies.
* Unemployment rates are still high but improving and that should provide some support for consumer spending.
* The new chair of the Federal Reserve has pledged to continue current policies of easy monetary actions.
* Corporate earnings continue to improve as the economy slowly recovers, employment levels remain low, and borrowing costs remain at record low rates.
* Optimism again is reentering the American investor psyche with money deposits and fixed income positions beginning to flow towards equities.
From an equity standpoint, we believe these factors will provide a supportive environment. And one day in the near future, we believe an equity tailwind will positively impact emerging markets as well, which have lagged U.S. markets for several years.
This is not to say that we are blindly optimistic. With the market having rallied as strongly as it did in 2013, there will no doubt be some form of correction as the market pauses to consolidate. Given today's headlines and what we know now, this will be an opportunity despite the fearful headlines.
Fixed Income, Commodities and Cash
Fixed income will struggle this year but I do not expect disastrous interest rate increases as the economy is still fundamentally sluggish and the Federal Reserve remains committed to keeping rates low. A strategy of low to intermediate-duration fixed income across a variety of assets is, in our view, the best course of action.
We continue to watch commodities but (at this point) do not see the need to populate portfolios with this asset group in any meaningful way. Current conditions simply are unattractive for commodity investing.
Cash will remain a negative 3 percent investment option when factoring inflation.
(Read more: It's not as gloomy as you think for retail)
While we're generally optimistic about the New Year, don't make the mistake of thinking that just because 2013 was a positive year for investing that the same will hold true in 2014. Past performance is not necessarily indicative of future performance and we should never forget that.
With markets having rallied from their 2008 lows, valuation becomes even more important. Regardless of the price-to-earnings ratio of Twitter and its post IPO price movement, you need to understand that the price of a stock in the long-term is indicative of its future potential cash flow. Optimism is helpful but it has to be backed up with raw numbers and earnings.
The key as always is to focus on a long-term plan and adjust tactically as conditions merit. It's not easy but it's necessary and is the key to long-term investment success.
—By Michael A. Yoshikami
Michael A. Yoshikami is the CEO and founder of Destination Wealth Management in Walnut Creek, California. He is also chairman of the firm's investment committee.