Predictions for 2014: Rodriguez, Fisher, Buckingham, Arnott

What about corporate earnings next year?

Fisher: They’ll be fine.

Buckingham: We’re optimistic but want to see some topline growth.

Rodriguez: The odds of earnings disappointments next year are a reasonably high probability. We’re already at eye-popping profit margins.

Arnott: Being at an all-time peak in earnings relative to GDP is a pretty dangerous space for further profit growth. Can profits go much higher? Not without risk of a major political backlash—a risk of Occupy Wall Street’s suddenly becoming a mainstream movement.

Your predictions for bonds?

Rodriguez: They don’t provide a safe haven. With interest rates and long-term yields at these levels, it’s a fool’s paradise. We continue to stay short in our bond portfolios—approximately two years. And that has been successful. We could go back to lower yield levels if the Fed accelerates quantitative easing, which is a reasonable possibility: Rather than taper, they buy for a longer period. That might lead to somewhat of a bond market rally. But with each year that we continue to expand the debt or liabilities and keep interest rates down, the odds of unintended negative consequences rise.

Buckingham: Investors have had an eight-year love affair with bonds, but the red ink this year will finally lead to a rotation into equities.

Arnott: The run-up in bond yields paired with a relatively bleak economic outlook suggests that bonds could surprise to the upside. I would not be a seller of bonds at the moment. I’m a very mild bond bull.

What will happen, then, with interest rates?

Buckingham: The Fed will very likely remain accommodative throughout 2014. We saw that even a modest uptick can cause fickle bond fund investors to head for the hills.

Fisher: Assuming quantitative easing ends, long rates go up and short rates stay low; and the spread between short and long rates rises.

Rodriguez: Interest rates are being massively manipulated by the Fed. When you drive rates to zero, almost anything qualifies as an investment; and people are running away from liquidity. Keeping interest rates down for a progressively longer period only blows up the bubble larger and larger—and it will pop.

Thoughts on Federal Reserve Vice Chairwoman Janet Yellen’s nomination as Fed head?

Buckingham: Ben Bernanke has done a terrific job of bringing the financial systems and economy back from the brink. You need to let the existing regime finish what they started.

Arnott: The Fed is currently run by academics who have never run a business or a bank—and that’s very dangerous. At some point they must taper and stop this nonsense of buying government bonds in what is ostensibly a recovery. Why should there be monetary stimulus in an economy they claim is growing? They have a failed policy, painted themselves into a corner and don’t know how to get out. It’s a very scary situation.

Rodriguez: The Federal Reserve is a temple with divine entities. But given that we’ve had the two biggest bubbles in the last 15 years and the Fed didn’t appear to be aware of either one, doesn’t give me a lot of confidence! [Yellen] will have to bring in a wider array of economic speed limits. But will that improve Fed policy outcome? I doubt it.

Fisher: Fed chairs’ activities before they head the Fed have not been terribly predictive of what they’ll do—though Mr. Bernanke remembered some of the things he knew before, and what he knew was wrong! The best thing the Fed head can do is remember: First do no harm.

Expectations for the SEC chaired by Mary Jo White?

Rodriguez: More regulatory changes. But have any that occurred over the last 42 years I’ve been in the business really helped? No. The captain of the ship, whether the Fed chairman or regulatory heads, were off the bridge when the new S.S. Titanic hit the iceberg in ’07. I give the last two administrations—which covered most of the two greatest bubbles—an “F,” as in failure.

Buckingham: A renewed focus on transparency and little patience with technical glitches with investing exchanges. Flash crashes and flash freezes matter psychologically: Investors are already soured on the financial markets. I’d like to see money spent on having a redundant system. It’s necessary.

Fisher: Mary Jo White will be more of what you could view as anti-financial services than recent SEC heads. But I don’t think that will change anything very much.

What sectors or stocks do you like for next year?

Rodriguez: When we look at valuations on equities, the number of companies qualifying are few. Our defensive positions and liquidity levels are in the top quartile. We have been reducing exposure to energy for the last two years. We’ve been primarily net sellers of stock. Pretty much the entire firm has more of a cautious attitude. No sectors pop out. It’s very one-off. Two recent additions to Capital Fund were Apollo Group and Centene Corp.

Fisher: There’s a long bull market ahead. That means you move into a realm where big, high-quality pays off: pharmaceuticals; big, boring names in technology; a little energy; consumer staples. Midsized banks and [non-European] foreign banks look pretty good—banks that are in the business of taking in deposits and making loans.

Buckingham: We’re overweight energy, industrials, materials and information technology. We like, for example, Ensco PLC, Caterpillar, Mosaic and Apple, all laggards so far this year. Also, Barrick Gold, American Eagle Outfitters, Deere & Co., Corning, HollyFrontier and Norfolk Southern.

Arnott: Beware of some of the more popular and trendy segments of the market because they’re fully priced. Broadly, I would be wary of U.S. investments because parts of Washington are at war with capitalism and the private sector, and that’s very sad and dangerous. Break through the risk of a portfolio of mainstream stocks and bonds with a diversified one that can respond to inflationary pressures and that invests in emerging market stocks and bonds, TIPs, commodities, REITs, high-yield bonds—the whole spectrum of assets that offer higher yield and higher growth rates.

And your outlook for international investing?

Fisher: The U.S. stock market has done better than the world. As we move through the rest of this bull market, that begins to equalize. Emerging markets are beaten up pretty badly and will probably get a bounce-back. European stocks are starting to play catch-up.

Arnott: I like diversification into emerging markets stocks and bonds because more and more of these economies are becoming less dependent on the developed world, less dependent on the U.S. than they’ve ever been. There’s blood in the streets in some of these emerging economies. That’s why they’re cheap. But does anyone really think their growth can be slower than U.S. growth? Faster growth and cheaper markets are a great combination.

Buckingham: We see opportunities in Europe, with names in the integrated oil space, including Eni, Royal Dutch and Total.

Any other prognostications for next year?

Rodriguez: Volatility in bonds is very high; volatility in stocks will be very high over the next several years. All the economic flows add volatility to investor expectations. When volatility rises, confidence tends to fall. If you’re not prepared for [all] that, you’re going to be in for a rude awakening.

Arnott: There’s tension between deflationary pressures and inflationary pressures. My betting is that inflation wins. With inflation, mainstream bonds are very dangerous and mainstream stocks are moderately dangerous. That’s not to say that very dangerous portfolio won’t perform well on a short-term basis. Next year might be OK, but at some stage it’s likely to be very disappointing.

Buckingham: We expect a gradual tapering. That is, there will be plenty of support from the Fed and thus no reason to think that the adage, “Don’t fight the Fed!” will be anything but a tailwind for equity investors.