Are Stocks in for Tough Sledding?

Investing Guide at Deep Blue Group Publications LLC - After posting scorching returns in 2013, stocks' flat performance in this year's first quarter seems anticlimactic. Many investors were no doubt expecting the good times to keep on rolling, while valuation-conscious types might have expected an even bigger performance drop-off.

With the first quarter receding in the rearview mirror, we decided to get Morningstar readers' takes on the action. What has been the biggest surprise thus far in 2014, and (cue the crystal balls) what do they expect will happen during the rest of the year?

Some investors said the first-quarter uptick in stock market volatility was indeed jarring. Others said they were surprised to see decent performance from their bond holdings so far in 2014, given the widespread pessimism that has hung over the fixed-income market for several years running.

Looking forward, many posters said they don't have high hopes for stocks for the rest of the year; a frequent refrain was that a still-sluggish U.S. economy will make it difficult to justify higher stock prices when they're already on the lofty side.

To read the complete thread or share your biggest investment surprise so far in 2014's early days--or your expectation of what lies ahead--click here.

'Bonds Have Behaved Better Than I Expected'

Stocks' herky-jerky pattern--up big one day, down big the next--has come as an unwelcome development for homebrewer in 2014's early innings. "My biggest surprise is how volatile the market has been; I expected some but not this much. I think fear is driving this market more than reason. The fear of being in the market when bad news hits causes selling and the fear of not being in the market when it goes up is causes buying."

Dawgie, meanwhile, has been surprised by the continued poor performance of emerging-markets stocks and bonds and the continued relatively poor performance of foreign stocks in general compared with domestic [stocks].

Meanwhile, several posters said they expected fixed income to be their portfolios' major pocket of weakness in 2014, but bonds have actually done quite well.

"I was surprised by interest rates, not because they fell, but how far down they went," said Darwinian.

BMWLover observed, "I'm surprised that the weather has sapped as much out of the economy as it has, especially since the west was actually warmer and dryer than average. The result was that bonds have behaved better than I expected. I was expecting to see the 10-year Treasury bond [yielding more than] 3% at this point in time." (The 10-year Treasury is currently yielding about 2.75 %.)

Ditto for artsdoc, who wrote, "I'm a bit surprised that my fixed-income side of my portfolio has returned more than my equity side."

But even as some posters were bracing themselves for poor fixed-income performance and better returns from their equity portfolios, other respondents said stocks' meh performance didn't surprise them at all. "The biggest first-quarter surprise for me is that the correction didn't arrive yet, and some nice gains have been made," wrote sportsden.

On the same page is atomiccab: "I am surprised that I am even with my end-of-year numbers. I expected the markets to go down after such a large runup last year."

Several posters pointed to REITs as being a pocket of unexpected strength thus far in 2014.

Dawgie was one of the respondents who had been expecting to see REITs revert to the mean. "Although they were off in 2013," this poster wrote, "their five-year returns are still very high."

Rathgar hoped to add to the asset class as valuations improved, but that hasn't panned out. "I bought REITs (Vanguard REIT Index ETF (VNQ)) low in December and planned to add monthly, expecting lower prices. With REITs up 10% I might have to add to another asset class."

Audreyh1 thinks she can explain REITs' late 2013 downturn--and subsequent bounceback. "Things that come under a lot of selling pressure late in the year--such as REITs and municipal bonds in 2013--seem to pop early the next year because the tax-loss selling is over," she said.

'Going Forward Will Be a Bit of a Slog'

Looking forward, many investors who posted predictions said they're not expecting a lot from either the stock or bond market for the rest of the year.

"I suspect that going forward will be a bit of a slog," wrote artsdoc. "Valuations are a lot higher than last year at this time, and I'm not expecting much more than treading water from my fixed-income investments."

On the same page, FidlStix quipped, "This bull's running low on testosterone. Having said that, I don't think the trap door is going to drop out from under the market in 2014--unless we have a world crisis that makes Ukraine look like a romp through the playground. We'll end the year about where we started. It'll be a bouncy year, though. Investors with strong stomachs who can ignore the greater volatility will do OK. Those who can't are likely to sell at the wrong time and shrink their nest eggs."

Bnorthrop believes that the rest of the year will feature a continued push-pull between stocks and bonds. "I expect 2014 to remain in a relatively flat dynamic tension between stocks and bonds. Continued suppression of interest rates lead to risk-on investments; Fed rumblings/expectations of rate increases lead to risk-off maneuvers. Slow-cook economic improvement gives the nod to equities."

Jomil agreed that the markets will muddle along, nothing more. "I expect more of the same because we are in a trader-controlled market with their ability to create and use volatility to an advantage in finding fleeting pockets of value to buy and sell in milliseconds before the trend changes. To beat them at this game, one has to buy and hold at lower cost, be lucky, or have their resources."

Homebrewer offered a host of macroeconomic and market predictions, including this: "If the total U.S. market ends at or above zero, I will be surprised."

'There Will Be No Buyers Left'

Yet other investors said they're even more pessimistic about stocks' prospects.

Sportsden foresees a correction later in the year. "I expect a strong correction by October, since the market seems to be ahead of itself--but, of course, nobody really knows."

Also expecting a big stock drop--not imminently but eventually--is Darwinian. "I anticipate more drops, probably of increasing depth, followed by partial or full recoveries. The market is overpriced, but it can't plummet yet, because there is still too much money on the sidelines. Once this has been sucked in, through 'buy-on-the-dips' strategies, then the big dive can begin, because there will be no buyers left."

Homebrewer advised that investors coming late to the party (and asset-flows data indicate there are many of them) could get burned. "People entering the bull late will drive P/E ratios up and get burned when the bear takes hold."

Meanwhile, BMWLover anticipates that a correction could be right around the corner. "Stocks, I keep waiting for them to correct," this investor wrote. "I think we'll see that in the second quarter with the first quarter's earnings reports giving sellers a reason to pull back and buyers pause."

So what will perform decently? Rathgar thinks that unloved inflation hedges may do all right. "I think inflation hedges will have a good year since most investors aren't thinking about inflation and these investments were cheap coming into 2014--REITs, commodities, Treasury Inflation-Protected Securities, and global bonds.

'No Idea'

Finally, it wouldn't be a "make your predictions" thread without at least a few investors commenting on the folly of trying to predict the market's direction.

Dawgie wrote, "What do I expect for the remainder of the year? No idea. I don't put much credence in market forecasts, and I certainly lack the insight to make any."

And Chief K joked, "My expectation for the market: About half of the people who buy shares of stock in a particular company will get 'the better end of the deal.' About half of the people who sell shares of stock in a particular company will get
'the better end of the deal.' I won't know which is which until after it's all over."

This investor's takeaway? "Index, repeat Index."

Asset-allocation parameters, not market prognostications, guide the way for Audreyh1. "Fortunately my investment strategy doesn't require me to guess which asset class will outperform. Whatever happens, I'll rebalance next January if my AA is sufficiently out of whack by then. What really surprises me is that the first quarter is almost over! Time flies!"

Article Source: http://news.morningstar.com/articlenet/article.aspx?id=641337&SR=WIG227