One can never really put a fine point on the economic and market outlook, though that doesn’t stop scores of strategists and many in the financial media from giving it a go, their dismal record (forecasting a gain of only 8.2 percent last year) notwithstanding.   For that matter, that never stopped me.  So…

Some things are clear enough.  Longer-term interest rates, which bottomed a few years ago, will be rising and the 10-year Treasury will approach a 3.5 percent yield, maybe even more, during the year.  Many bond prices already reflect expectations.  Short-term rates, near zero now, will remain there all year.  That means yields on money-market funds, CDs, T-bills and such will be virtually zero.  

Stocks will continue to transition from being undervalued five years ago to being fairly valued now en route to being significantly overvalued at some point.  The market doesn’t spend much time at a fairly valued level.  Either it’s in transition from being undervalued to overvalued, or the other way around.  We are in the former now.  One reason is that the global economic picture is gradually improving, especially here and in much of Europe.  Very accommodative central bank policies worldwide are paying off.  

Earnings have grown for a few years thanks primarily to share buybacks and financial engineering with interest-rates near zero.   But earnings growth ultimately depends on an increase in capital spending in a growing economy.  If investment comes along then GDP and earnings growth will accelerate and the estimated $120 for S&P operating earnings in 2014 will materialize and perhaps even be exceeded.  That would mean stocks are far from overvalued now and could become considerably undervalued as the year unfolds and investors look forward to more growth in 2015.  Fair value for the S&P is around 15 times earnings, which is where stocks are now.  Bull markets never end when stocks reach fair value, however.  Investors always overshoot and at the end stocks become truly overvalued.   They always overshoot on the down side as well, as we saw in 2009.

Stock market history shows that after surges similar to the one in 2013 the subsequent year is usually a good one. I expect that to be the case in 2014.  In spite of the shaky start to the year, most expect an 8 to 10 percent return.  I can’t disagree.