The overwhelming consensus prediction on Wall Street for 2014 is that this will be the year the U.S. economy finally takes off, which should translate to a more gains in the stock market and more pain for holders of gold and U.S. Treasuries.
Emad Mostaque, a strategist at NOAH Capital Markets, stands out from this crowd: in his 2014 investment outlook, he predicts basically the exact opposite of everything the consensus thinks will happen this year.
Specifically, Mostaque expects U.S. stocks (measured by the S&P 500 index) to fall 15-20% in 2014, gold to rise more than 20% to $US1500 an ounce, and the yield on the 10-year U.S. Treasury note to collapse to 1.5% from current levels around 3.0% as market participants come to realise that “the strength of the U.S. economy has been overstated.”
The bearish view is predicated on the belief that S&P 500 earnings per share will actually fall in 2014, whereas most on the Street are calling for EPS growth to drive further gains in the index this year after multiple expansion fuelled much of 2013’s stock market rally.
“Last year’s stellar returns on anemic EPS growth of 6% (to $US106 vs. my $US107.5 target), were predominantly through rerating of the index,” says Mostaque. “Digging into that EPS figure, one can see further weakness as it would be negative without buybacks and loan-loss reserve releases from financials, which need significant ROE expansion from here.”
In this environment, Treasuries should be set for a big rally.
“I see bonds having a final blow soon on some ‘good’ data in Q1 before outperforming significantly for the rest of the year, with U.S. 10-year yields resuming their steady path towards our eventual target of 1%,” says Mostaque.
“Note a drop in real interest rates is bullish gold and, given a deteriorating economic outlook, I would expect to see the barbaric relic hit $US1,500 this year.”
Aside from weak economic dynamics, Mostaque identifies two more reasons why investors may rush back into Treasuries, contrary to consensus expectations. In his outlook, he writes:
First, with bonds falling sharply last year (TLT for example down 16%), massively underperforming equities, with US equities up 30-40%, means that real money allocations are hugely skewed.
For example, a 60:40 classical allocation to the SPDR S&P 500 ETF and iShares 20+ Year Treasury Bond ETF at the start of 2013 would now be a 70:30 split, necessitating a significant rebalancing. After a good year in 2013 for equity allocations, risk-averse allocators will be doing exactly that in the first half of this year, particularly with long-term returns from domestic equities looking scary and few daring enough to dive back into the larger, more liquid emerging markets.
Secondly, positioning is dramatically against bond duration, with consensus being that the bull market is over and this is an ideal time to short, with plenty of nice new products to do so hitting the market and raising billions, always a nice contrarian sign.
It’s as if nobody learnt from the Japanese “widow-maker” trade.
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