2014 Outlook Update: A Year of Validation Indeed

Year of validation:  We coined this phrase in Russell’s 2014 Annual Global Outlook last December to describe our overarching prediction for 2014. In that report, my colleagues on the global team of investment strategists agreed on the macro-view that 2014 would represent a year of validation more than a year of appreciation. Generally, we meant investors would see the gains of the previous few years, including the 33.5% surge for the U.S. broad-market Russell 3000® Index in 2013 and 16.4% increase for 2012, validated by the growth of the economy and corporate profits.

Now, at the end of the third quarter of 2014, our ongoing examination of the underlying fundamentals in the macro-data offers little reason to waver from our “year of validation” call.

We’ve said it before, but we do not predict a recession in the U.S. market or globally. Yes, we continue to face spasms of geopolitical concerns that can dominate the news – something that can further unsettle nervous investors. However, we believe markets have already discounted many such risks. And, in any event, we believe that geopolitical volatility is a type of risk that can pay off for the active, yet disciplined, investor.

While we foresaw a pull-back from double-digit returns to single-digit returns for 2014, we would remind nervous investors that the 10-year annualized return for the Russell 3000 Index was 8.5% through Sept. 29, 2014. That means 2014’s year-to-date return of 7.4% for the Russell 3000 both validates 2013’s rally, and represents a somewhat average year for the decade.

Yes, our “year of validation” theme for 2014 survives. But what about other views expressed in our Annual Global Outlook in December? At Russell, we are continually updating our tactical positions, and below I’ve listed some views on how 2014 is unfolding (as of Sept. 30). More detail on these will follow in our upcoming quarterly outlook update in mid-October:

  • Global equities vs. fixed income: We remain moderately positive on global equities, particularly relative to fixed income through 2014 and into 2015, but with a smaller overweight.
  • Within fixed income, we’re slightly underweight duration and we also slightly favor spread products over outright treasury exposure.
  • Market valuation indicators: Within equities, the regional market we like most at this point is Europe. Looking at our current equity hierarchy, we’d rank the major regional asset classes in this order: Continental Europe/UK Equity, US Large Cap, Non-US Developed Equity, Japan and Emerging Markets.
  •  Business cycle indicators: Many of these indicators remain moderately positive, and our U.S. cycle score in particular provides enough evidence to keep our opinion that 2014 remains a “buy the dips” market.

Yes, while 2014 is a year of validation for markets, we’re not in a “set and forget it” mentality in terms of investment portfolios. There are numerous and ongoing considerations for investors in achieving desired outcomes. 

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Investing involves risk and principal loss is possible.

Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.

Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation.

Diversification, strategic asset allocation and multi-asset investing do not assure profit or protect against loss in declining markets.

The Russell 3000® Index measures the performance of the broad-cap segment of the U.S. equity universe. It includes approximately 3,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 3000 represents approximately 98% of the U.S. market.

Russell Investment Group, a Washington, USA corporation, operates through subsidiaries worldwide including Russell Investments. Russell Investment Group is a subsidiary of The Northwestern Mutual Life Insurance Company.

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