The market staged a huge rally on Wednesday after the Federal Reserve finally started its long-awaited taper during Chairman Ben Bernanke's swan song. Investors seem to have taken comfort from comments that the Fed now believes the economy is robust enough to finally draw back some of its largesse.
The Fed has had a fairly lousy recent record, however, on forecasting an accurate economic growth rate. I would take this outlook with a major grain of salt. The rally did seem appropriate in light of the huge rise in the market in 2013 and it is a good way to close what has been a remarkable year for equities.
I am looking for 2014 to be a more subdued year in the market with equities increasing in line with earnings growth of 5% to 10% providing margins and economic growth hold up. It is hard to see multiple expansion continuing at 2013's pace in the New Year with the Fed starting to withdraw liquidity.
I also think the "Risk On" areas that led the market in 2013 such as biotech, new IPOs like Twitter (TWTR), small-caps, and high flyers with sky high multiples like Amazon (AMZN) and Tesla Motors (TSLA) are unlikely to outperform again in 2014.
The market has also gone more than two years now without so much as a 10% decline. I think there is a high probability such an event occurs in 2014 given the huge run equities have had over the last few years and the unknown ramifications from the Fed withdrawing liquidity from the markets.
Boring blue chips with low volatility, valuations under the overall market multiple and solid dividend yields should be back in fashion in the coming year. Here are two that are in my portfolio. I expect both to return 10% to 15% in 2014 including dividends even as the overall market consolidates. Not sexy, but nothing to sneeze at either.
The recent over 5% decline in ConocoPhillips (COP) over the past few weeks offers a solid entry point to start to accumulate or add to existing holdings of this cheap large exploration and production concern. The company has become more focused in recent years on becoming a more streamlined energy concern with greater attention paid to its rapidly expanding production from North America.
It spun off its refinery and marketing businesses in 2012. It also has allocated more resources to its North American properties while selling off some overseas assets. Over 50% of its capital budget is dedicated to growing liquids rich production in the United States which is going through an impressive energy boom. The stock is not expensive at under 11x forward earnings given its 4% dividend yield.
Microsoft (MSFT) could be boosted in the New Year with a selection of a new CEO. Investors will be looking for someone who will better focus the software giant on some of its core software businesses. I would also expect the company to better reward shareholders utilizing the over $70 billion of net cash and market securities Microsoft currently holds on its balance sheet worldwide.
Despite the decline of global PC sales, revenues are still growing at a 6% to 8% annual range. It also has two web businesses (Azure and Office 365) that are already billion dollar services by annual sales and growing rapidly. Equating for net cash, MSFT sells for less than 10x forward earnings and yields around 3%.
Neither of these selections is likely to provide returns investors have grown accustomed to in 2013. However, in a more volatile market they are likely to deliver stable results in the New Year.