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Ask our strategists a question

In past decades, when the US economy was growing, in how many of those years was the S&P 500 Index up, and in how many was it down? In other words, what is the probability that the stock market will be up in 2014?

The market is driven by fundamentals – namely corporate earnings. Yes it is great to have a favorable economic backdrop for companies to make money but U.S. companies have shown they can increase profits even in a slow growth economy. Earnings in 2013 reached the highest level ever despite economic growth of about 2.5%. Based on the current earnings season and the projections for earnings in 2014 I would say the chances of the market going up a pretty good.

You constantly drill that fundamentals drive everything. With earnings being up and the Fed Tapering, how does this affect the fundamentals of sticking with a portion of a portfolio staying in bonds?

I think January is a terrific example of why you always want bonds. Long US Treasury bonds returned 6% while equities across the board were negative. Bonds offer diversification and risk control. The fundamentals – earnings - are coming in better than expected. I expect 2014 to be the highest level of corporate earnings ever and I anticipate the market will go up. However, the path up is not always straight and there will be more market volatility as the Fed hands the reigns back over to the market. Global Perspectives advocates a broadly diversified portfolio of both stocks and bonds.

Is China going to be a problem?

We are indeed watching China with a close eye. They are the world’s second largest economy and a huge driver of growth. Their GDP growth slowed in 2012/2013 but that was not unexpected based on the double digit growth rates they had been reporting. But I am more concerned about their credit bubble. The government has made cursory attempts to slow down credit but the problem is growing and we may see trouble when these loans come due. So China may very well be a problem. This is one of the global risks we advise investors to watch in our Global Perspectives materials.