Gluskin Sheff’s David Rosenberg, who has been turning increasingly bullish, has published his 2014 outlook.
Rosenberg thinks the U.S. economy will surprise to the upside next year.
In fact, the title of his note is “The Year of the Horse: The one that’s about to break out of the gate.”
Here’s a brief summary of his 10 major calls for 2014:
- There is more upside potential in 2014 than downside risks. Rosenberg thinks in 2014, the “upside macro surprise shifts from the UK to the U.S.” 1984, 1994, and 2004 ended up being surprise years, and Rosenberg writes that investors should “beware of all years that end with a ‘4’, since they “all fit this bill of economic acceleration.”
- The stock market suggests that economic growth will improve in 2014. The market is seen as a leading indicator of growth. In the last 60 years, real GDP growth has always been positive when the S&P 500 climbed 60%. Any surprise in growth will be to the up side.
- Fiscal headwinds will subside and business spending could emerge as the key catalyst for growth next year. 2013 was rough with the “early year tax bite, the sequestering and the government shutdown.” But things are picking up. “The deceleration to 0% productivity growth, which has a direct link to profit margins, will finally incentivise the business sector to invest organically in their own operations with belated positive implication for capes growth.”
- The U.S. economy does not suffer from secular stagnation. The economy had so far been held back by household and federal government balance sheet repair. Rosenberg expects the economy to surprise “to the high side after a prolonged period of unsatisfactory post-recession growth.” But he points out that “the upside for next year from a business or economic perspective as opposed from a market standpoint is considerable.”
- The capital stock is very old and will be replaced. “The last time the corporate sector allowed its capital stock to get this old and obsolete was back in 1958 and then annual growth rate in volume capital spending rise to from -6% to 13.5%,” writes Rosenberg. “Revived capex growth is likely going to emerge as a key bullish cyclical theme for 2014.”
- With the housing recovery’s role in supporting the economy, the torch will have to be handed over to the consumer. “The flow of savings into the household sector is now running in excess of a $US600 billion annual rate, up 6.4% from year-ago levels, and serving up a nice cushion for the spending outlook.”
- Job market and consumer confidence improve. Rosenberg thinks we are two or three months from see jobs outside of the financial sector hit a new all-time high.
- Future returns in the stock and bond markets will be muted. In the bond market, coupons are low and banks have been trying to fight deflation and this “limits the potential for future yield declines, that it seems hardly likely that there will be any capital gains down the road.” The stock markets in the U.S. has had 25% gains “in what has turned into a backdrop almost exclusively reliant on multiple expansion.” Instead he thinks returns will have to be found in “yield curve plays to credit strategies to sector rotation.”
- The Fed will fall behind the curve. “There was always this symbiotic relationship — the Fed would lead the bond market, and then pay heed to what the market was saying in return,” writes Rosenberg. “The problem now is that it is next to impossible for the Fed to heed a message from a market that is trying to dominate.”
- Expect volatility as Janet Yellen prepares to take over from Ben Bernanke. Volatility always becomes a “watchword” during a transition of Fed chairs. What’s more, at least six Fed governors and bank presidents are set to step down as well, which also means a new FOMC.
Earlier today, we learned Q3 GDP growth crushed expectations and surged to 4.1%.