The research predicts modest gains for equity markets and higher bond yields in 2014.

Politicians and policy will likely remain the biggest threats to U.S. economic recovery. U.S. monetary policy and political pressures worldwide could also impact the 2014 performance of various asset classes.

So warns Russell Investments in its fourth-quarter Strategists’ Outlook & Barometer survey. The report examines economic and market indicators from Russell’s global team of investment strategists, whose insights help to guide the firm’s multi-asset portfolios and services.

The research predicts modest gains for equity markets and higher bond yields in 2014 as the world’s major economies continue to grow. 

“As investment strategists, we are normally presented with a difficult task of forecasting capital markets, but this task seems far easier than the recent near impossible one of forecasting politicians,” says Doug Gordon, senior investment strategist for North America at Russell. “Looking at the path ahead we believe additional volatility may continue, but this could be leveraged as an opportunity to increase tactical equity positions, such as within multi-asset portfolios.”

Russell’s strategists continue to favor equities over fixed income, and they remain moderately positive on equity markets globally. Looking regionally, the strategists continue to prefer European equities over U.S. equities. And they believe emerging market equities look increasingly more positive, possibly offering double-digit earnings growth in 2014.

“As we look toward 2014, we’re forecasting synchronized growth across the U.S., Japan and Europe for the first time since 2010,” said Andrew Pease, global head of investment strategy at Russell. “We also see a strengthening low-inflation recovery that favors equities over bonds, despite relatively full equity market valuations.”

Among the report’s findings:

  • Real Gross Domestic Product (GDP) growth will likely close out 2013 at 1.6 percent.
  • Without significant fiscal tightening, the U.S. could achieve nearly 3 percent growth in 2014, with job gains averaging 200,000 per month over the next 24 months.
  • By the end of Q3 2014, the 10-year Treasury should yield 3.2 percent.
  • The U.S. economy should achieve year-on-year real GDP growth of 2.9 percent in 2014.
  • Economic growth in the Eurozone will remain “positive, but lackluster,” in 2014, with growth rates ranging between 0.5 percent and 1.0 percent.

“The impact of the political fireworks in the United States and geopolitical risks have meant buying opportunities in the U.S. equity markets for those nimble enough to capitalize on the resulting volatility, though our recommendation to the less agile and more risk averse remains equity overweight,” says Gordon. “Though we’re considerably less bullish long-term than earlier in the year, we still prefer U.S. equities over fixed income.”