The economy and stock market outlook / prices in 2014

The Investment Reporter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

The global economy is expected to grow more quickly in 2014. Also, North American companies are sitting on mountains of cash. They’ll either pay more to shareholders or invest it and raise economic growth. Gradually buy high-quality, dividend-paying, stocks.

In this article we present our forecast for the economy and stocks in 2014. Just keep in mind that predictions—ours included—are the weak link in the investment process.

The global economy is set to improve in 2014. A survey of forecasters by The Economist shows that Canada’s GDP is expected to grow by 1.7 per cent this year and 2.3 per cent in 2014. (GDP, or Gross Domestic Product, is the value of all the goods and services an economy produces in a year).

The U.S. should do even better. Its GDP is expected to increase by 1.7 per cent this year and 2.7 per cent in 2014. With three-quarters of Canadian exports going to the U.S., faster growth there adds to our growth. The Euro-zone’s GDP shrank by 0.4 per cent this year. In 2014, its GDP is expected to expand by one per cent. That’s not fast, but at least now it’s going in the right direction. The GDPs of each of the G7 countries is expected to grow faster except for Japan. (The G7, or Group of Seven industrialized countries, includes, the U.S., Japan, Germany, the United Kingdom, France, Italy and Canada.) Japan’s GDP growth is expected to slow from 1.8 per cent this year to 1.5 per cent in 2014.

The global economy is revving up

A pickup in economic growth in the Euro-zone is positive for China. That’s because Europe remains China’s largest export market. In 2014, China’s GDP is expected to grow by between 7.5 and 7.8 per cent. That’s close to anticipated GDP growth of about 7.7 per cent this year.

The Canadian and American economies could grow faster than expected. That’s because some companies are sitting on piles of cash. If they start to invest more vigorously, economic growth would speed up. Alternatively, cash-rich companies could reward their shareholders with dividend increases, one-time special dividends or share buybacks.

Another factor that could assist the Canadian economy in 2014 is the lower loonie (see here). Then again, lower commodity prices works against exports.

Faster global economic growth should enable Canadian companies to raise their earnings. As we often note, company earnings are the main factor in setting stock prices in the long run. Benjamin Graham, the father of fundamental stock analysis, once said that in the short run, the stock market is a voting machine. But in the long run, it’s a weighing machine. With earnings likely to grow in 2014—and interest rates likely to remain very low—we’re cautiously optimistic that stock prices will rise further. Just remember that a ‘correction’ could set back prices by 10 to 20 per cent.

The stock market is forward looking, assessing how companies are likely to do. Provided that the Canadian economy and company earnings do better than expected, stock prices would likely increase. All the same, there are also several risks that could hurt Canadian stocks. One is U.S. politics. In early 2014, Congress needs to raise the ‘debt ceiling’ and pass a budget to prevent a long-lasting shutdown of the U.S. federal government.

A second risk for Canadian stocks is a setback in U.S. stocks. After all, the Canadian market usually follows the U.S. market. After such a strong year for stocks prices in 2013, a pullback in American stocks could happen. If it does, Canadian stocks would likely get sideswiped.

A third risk is that some companies’ revenues may fail to grow much. While many companies earned more in recent years, in many cases these earnings came about from cost cutting—not from higher revenue. Without a pickup in revenue, it’s harder for companies to keep raising their profits quickly and in a sustainable way.

Unforeseeable risks also exist. Will Iran abide by its agreement not to produce an atomic bomb? Will Europe keep the Euro-zone intact? Will pipelines from Alberta’s oil sands to refineries and export terminal get built? The fact is, the world’s an uncertain place. We’re bound to face issues of which the outcomes are difficult or impossible to predict today.

The market ‘climbs a wall of worries’

If you wait for a risk-free time to invest, then you’ll always be sitting in cash instead of putting that cash to work for you. Should a risk-free environment miraculously appear, then it’s probably time to sell. After all, when things can’t get any better, they can only get worse.

Given some uncertainty in the outlook for stocks in 2014, we advise you to focus on ‘dividend aristocrats’. That is, companies that have raised their dividends in at least each of the past five years. We list 23 Canadian Key stock buys that are also dividend aristocrats. We list 5 of these on this page below. A dozen of the 20 stocks that we expect to beat the market in 2014 are dividend aristocrats.

Dividend aristocrats are also apt to climb in price. Their rising dividend yields attract income-seeking investors who bid up the prices of your stocks. Also, earning regularly-rising dividends gives you cash to take advantage of bargains in stock market setbacks. Then, too, your dividends give you a return even when stock prices go nowhere.

Remember to diversify across the five economic sectors: finance, utilities, consumer goods and services, manufacturing, as well as resources. We advise you to put at least 10 per cent but no more than 30 per cent of your stock money into each sector. Keep in mind to also diversify within each economic sector. Within the financial sector, for instance, you might buy one bank, one life insurer and one mutual fund company.

Continue to invest gradually. That way, in times when prices are higher, your regular purchases buy fewer shares. In times when prices are lower, your purchases buy more shares. Such dollar-cost averaging enables you to profit. You end up buying most of your shares at below-average prices.

We still like the long-term outlook for stocks. So keep buying high-quality, dividend-paying, stocks in 2014, for long-term share price gains and rising dividends.

5 Dividend Aristocrats

The 10 Key stock buys below are ‘dividend aristocrats’ that have raised their dividends in at least each of the last five years. Their current yields are noted in column two. In column three, we show their current dividends and in column four, their dividends five years ago.

FiveYears Ago
Atco Ltd. 1.6% $0.75 $0.47
BCE Inc.  5.0% $2.33 $0.73
Cdn. Nat.’l Railway
Canadian Tire
Canadian Utilities




The Investment Reporter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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