By Jim Lowell, MarketWatch
Stop me if you’ve heard this one: 2014 is a year that favors most stock markets rising and the broad bond market falling.
Full disclosure: I think it’s hard to argue against that view. Earnings, economic and even behavioral data suggest a mending trend. But, while this very well may turn out to be the case, it doesn’t mean that smart investment selection won’t play an essential role in how your portfolio fares, any more than it means you should abandon all types of bonds wholesale.
In mid-December, our own Federal Reserve stepped up their forecast for U.S. economic growth and reset expectations that they will taper their current bond buying stimulus in every Fed meeting this new year unless the data contradicts their view for moderately faster growth. At the close of 2013, the IMF also upgraded its growth forecast for the U.S.
I think those upgraded views for moderately faster growth here will have a halo effect on European bourses and emerging markets from China to Mexico. But at the risk of sounding like a beauty pageant contestant, a lot has to do with world peace: the more peace the better. Also, a lot has to go right with our own recovery: moving from creating more jobs to better-quality, higher paying jobs is key. A lot has to go right with the early stage recovery in Europe. A lot has to go right if emerging markets are going to be able to move from late-stage to a resurgent phase of growth.
No doubt there will be plenty of doomsayers along 2014’s route — those who make their living pontificating what they don’t practice are never in short supply — but their tank of credibility is running on empty … and their portfolios resemble a gashed hot air balloon. Absent believable doomsayers, the raw velocity of money coming into the markets could have a rising tide effect that looks pleasing but could be tricky to navigate toward year-end. Don’t get lulled into complacency by easily gotten gains.
My 2014 portfolio may not rise as high as some others, but it is positioned to not crash land should current tailwinds turn into unforeseen headwinds. Here it is:
For a theoretical $100,000 2014 model growth portfolio I would weight in favor of the U.S.
I’d start by allocating 20% ($20,000) in the State Street SPDR Dow Diamonds /zigman2/quotes/208954582/composite DIA -0.56% ; multinational battle ship balance sheets continue to make sense to me.
I would place another 20% in the actively managed, no-load Fidelity Strategic Dividend & Income /zigman2/quotes/204978494/realtime FSDIX +0.07% . Lead manager Joanna Bewick invests in a mix of approximately 50% stocks, 15% real estate investments, 15% convertible securities, and 20% preferred stocks. The current mix is 51% stocks, 15% real estate, 11% convertibles, and 18% preferred, with the remaining in cash. The top three sectors are financials (25.9%), information technology (13.4%), and health care (12.1%). Top holdings include Chevron /zigman2/quotes/205871374/composite CVX -3.23% , Apple /zigman2/quotes/202934861/composite AAPL +0.04% , Microsoft /zigman2/quotes/207732364/composite MSFT -0.23% , Procter & Gamble /zigman2/quotes/202894679/composite PG +1.91% , Simon Property Group /zigman2/quotes/209746667/composite SPG -5.44% and Pfizer /zigman2/quotes/202877789/composite PFE +2.06% .
I continue to like being overweight health care: lower risk, market-like gains, with demographic and emerging global consumer class needs that not only won’t quit but will continue to increase. I like the new Fidelity MSCI Health Care Index /zigman2/quotes/201098344/composite FHLC +1.17% . It is a U.S.-centric health-care ETF; foreign investments are 1.8% of the holdings. The index range spans the production of health care equipment and services as well as those that are engaged in the R&D, production, and marketing of pharmaceutical and biotechnology products. Top holdings include Johnson & Johnson /zigman2/quotes/201724570/composite JNJ +1.44% , Pfizer, Merck & Co /zigman2/quotes/209956077/composite MRK +1.92% , Gilead Sciences /zigman2/quotes/210293917/composite GILD +0.56% and Amgen /zigman2/quotes/209157011/composite AMGN -0.30% .
Beyond the U.S., I think Europe is likely to gain some momentum to their early-stage cycle of recovery … not to the point of achieving our own mid-cycle stage, but heading there. That could make Europe a likely place for outsized gainers relative to the U.S. marketplace; a stock pickers market where a solid manager like Jed Weiss at Fidelity International Growth /zigman2/quotes/200099333/realtime FIGFX +1.22% could add some real return value with less risk than owning one or two bourses. I’d make that stake 20%. You could also pairing the Vanguard FTSE Europe ETF /zigman2/quotes/200270338/composite VGK +1.04% with iShares MSCI UK /zigman2/quotes/203635666/composite EWU +0.77% in a 2/3rds 1/3rd split to arrive at that 20% stake.
If the U.S. and Europe grow faster in 2014 than they did in 2013, the emerging markets should be able to move from their late stage cycle into an early stage cycle without dipping into a pothole of recession — the worst-performing stock market region of 2013 could turn out to be the best performer in 2014. But I’d tread lightly and weight in favor of an emerging market gateway/emerging market play at the outset of 2014: 5% in iShares MSCI Japan /zigman2/quotes/201162210/composite EWJ +1.31% and 5% in WisdomTree Asia Pacific Ex-Japan .
Finally, I like junk bonds in 2014. While the spread is not attractive, their relative yield is — but it’s their ability to act more like stocks than bonds in a rising rate environment (which means they could be a better buffer than intermediate investment grade bonds) that I like most. I’d place 10% in Fidelity High Income /zigman2/quotes/208133145/realtime SPHIX +0.37% or the iShares High Yield Corporate /zigman2/quotes/204471305/composite HYG +0.10% as a buffer for my 2014 model growth portfolio.
Looking ahead, I think there will be as many opportunities for gains in 2014 as we found in 2013 — but that finding them will take more legwork. From the ability to seek dividends across a spectrum of opportunities (the ability to embrace currency, REITs, commodities as well as the woebegone money market fund), to the ability to include everything from consumers to cyclicals, will be key to my more narrowly focused tactical trading columns throughout 2014. I’m good to go.