For many investors, the first half of 2014 has generated modestly positive results. Stock indexes like the Dow Jones Industrial Average and the S&P 500 have gone up in the past six months thanks in part to economic growth.
Bond prices, which often move in the opposite direction from stocks, have also increased in recent months because many investors were anticipating an economic slowdown in the near future.
Looking ahead to the second half of 2014, the health of the U.S. economy and the status of interest rates will continue to affect the investment climate. Corporate earnings reports and key indicators like the monthly unemployment rate and the number of new jobs created will have an impact on the stock market.
But if the labor market keeps improving and interest rates start to rise, then bond prices are likely to decline. New bonds will be issued with higher rates, making older bonds less attractive. However, many investors hold bonds for the long term in order to provide a steady stream of income, so there’s usually no pressure to sell those securities and take a loss.
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Of course, there are many other issues for investors to consider, including political strife in Ukraine, Iraq and other parts of the world. That's a good reason to maintain a diversified investment portfolio that includes stocks, bonds and other types of assets such as real estate.
For investors, one of the surprises of 2014 has been the strength of the U.S. and European economies, compared with China, Brazil and emerging markets around the world. That’s a dramatic change from the global growth pattern of recent years.
Since the U.S. and Europe are the largest consumer markets in the world, their household spending will help goods-producing regions like China, Korea and Southeast Asia. Demand is also expected to grow for commodities, particularly food products. On the other hand, oil prices appear to be stable, despite turmoil in the Mideast, as the U.S. has gradually increased production to be less dependent on foreign suppliers.
However, higher demand for commodities and manufactured goods may also lead to an increase in prices from suppliers, leading to a higher inflation rate in the near future. Last year, a key measure of core inflation, the Personal Consumption Expenditure (PCE), remained well below the Federal Reserve’s 2 percent target level. But in recent months, food prices have gone up, a signal that the core inflation rate may move higher in second half of 2014.
That trend could lead to an upturn in interest rates, which remain at relatively low levels around the world. Therefore, investors who are thinking about purchasing income-producing residential or commercial properties might want to lock in their financing at current mortgage rates rather than risk the possibility of paying more this fall.
Because the U.S. and global financial markets are likely to remain choppy in the next few years, investors can benefit from holding a well-diversified portfolio that smooths out the highs and lows.
For example, real estate and Treasury Inflation Protected Securities (TIPS) can help address the risk of inflation. Having a portion of your portfolio in liquid securities like a money market fund can provide a cash reserve or be used to buy other assets if the right opportunity is available.
Regardless of what happens in the next six months, it will be important to maintain a diverse portfolio with several different types of assets. While diversification does not guarantee a profit or protect against a loss, it will continue to be a sound strategy for long-term investors.
Andrew Menachem, CIMA, is a Wealth Advisor at the Menachem Wealth Management Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS