It is always dangerous to make predictions, especially for an entire year.   However, reasoned judgments should be considered for their potential impact on investments.  Here are our thoughts going into the New Year:

General Thoughts:

1)    There will be more turmoil in the Middle East as Sunni and Shia Muslims escalate their fights against each other for power and influence.  This may cause a spike in oil prices sometime this year.  The biggest loser will continue to be the minority Christian communities.

2)    With it being an election year, there will be no major legislation coming out of Washington (immigration, tax reform, entitlement reform, etc.).

3)    Obamacare will dominate the news for most of the year.  It will radically change parts of the economy as healthcare makes up 1/6^th of the U.S. GDP.  We think this will have some major unintended consequences in 2014.

4)    Tax increases in France – VAT Tax and 75% tax on millionaires – and Japan – 3% increase in sales-tax – will make economic conditions worse for these two countries.  This in turn will slow down world-wide economic growth.  Additionally, the tax increase will hit Japan hardest because the tax increase occurs on April 1^st, the same time the public-sector spending ends under Abenomics.

5)    If the Federal Reserve continues to taper, it will be at a snails pace.  We don’t see short term rates moving up anytime in 2014.  Our biggest concern is that the Federal Reserve has no more bullets left to stimulate the economy if there is a crisis that hits the U.S. (9/11, 2008 market crash, etc.).

6)    The European crisis will come back into the headlines as the social rift between Southern Europe (20+% unemployment) and Northern Europe (less than 7% unemployment) intensifies.

7)    For fun:

1. Bengals will win the Super Bowl.
2. Reds will trade Brandon Phillips.
3. THOR: The Dark World wins the Oscar for the Best Movie of the Year.
4. Fat ties and longer skirts will come back into fashion.
5. McDonalds will put the McRib on their permanent menu.
6. Miley Cyrus checks into rehab.

Markets and the Economy:

1)    The markets will mean revert and the stock market will underperform other asset classes.  However, we believe emerging stock markets will be one of the better performing equity markets.  Hard assets will be the best performing asset class in 2014.

2)     Inflation will finally start to rise as the Federal Reserve continues its ultra-easy policy.  Although short interest rates will stay low, longer term interest rates will continue to grind higher.

3)    Corporate profit margins will fall from historical levels after having the “wind at their backs” over the past few years (lower employee costs, lower interest rates, lower tax rates, etc.).  Those factors will suddenly become a head wind for corporations and, thus, reduce profit margins from their current all-time high level.

4)    Sometime throughout the year, there will be a 15-20% correction in the stock market.  Why you ask?  This has been one of the longest runs in equity prices without a “normal” correction.  Basically, we are due for some profit taking.

5)    Volatility will increase this year within the stock market.

6)    Collectibles – art, fine wine, automobiles, coins, etc. – will continue to appreciate as too much money chases investment alternatives.  Those items that are the rarest will appreciate the most.  Note:  Don’t ever invest in a collectable unless you are very knowledgeable or hire an expert.

We are certain that there will be some unexpected things that arise.  Some will be good and some may be bad.  We are hoping that the good outweighs the bad.   We wish you and your family a wonderful 2014!

Sincerely,

Your THOR Team