Where in the World to Invest

The early results are in for 2014. After a couple of weeks of trading, things haven’t been as smooth for the equity markets as they were last year. Now, I guess that situation should come as little surprise for market observers, as 2013’s big run higher was an anomaly historically. So, how do some of the bigger markets stack up after nearly 10 full trading days?

In the United States, the S&P 500 Index has started out quite volatile, with several big sell-off days, as well as several big winning sessions. Year to date, however, the benchmark measure of large-cap domestic stocks is literally flat, trading right where it began in 2014.

The action so far in 2014 in other developed markets around the world basically has been the same. For example, the iShares MSCI EAFE Index (EFA) is a broad measure of the international developed markets. Similar to SPX, EFA basically is flat so far in 2014 (-0.2%).

Now, this muted start not withstanding, I think that EFA represents an area of opportunity for investors in 2014 when compared to domestic equities. One reason why is that the Federal Reserve likely will continue to taper its bond-buying program, while other countries such as Japan, and countries in the European Union, are stepping up efforts to stimulate their respective economies (and stock markets) by keeping the monetary spigots going full blast.

In the case of Japan, that nation’s central bank, The Bank of Japan, continues to implement its form of quantitative easing that’s about four times as large as the Federal Reserve’s program here at home.

One key sector I’m watching to tell me if the developed markets will have some legs in 2014 is commodities. The chart to watch here is the DB Commodities Tracking Index Fund (DBC). For the past 10 trading sessions, we’ve seen DBC fall about 2.8%, so there hasn’t been a sign of commodity price inflation just yet. If there is a reversal in this market segment, it likely will be a leading indicator telling us that global growth is making its way into the commodity market.

Finally, interest rates always are a big deal to watch, as they are a great indicator of what’s ahead for bonds and other income securities. As you can see by the chart here of the benchmark 10-year Treasury note yield, 2013 was a big year for rising interest rates. That rise kept a lid on bond prices. So far in 2014, there has been a relatively significant decline in interest rates, as the yield on the 10-year has fallen to 2.89%. Recall that it finished the year above 3%.

So far, the jury still is out on where in the world to invest in 2014. But based on last year’s unusual gains in domestic stocks, I think the value play with much more relative upside is in international equities, particularly developed markets and Japan. I also think commodity prices will provide confirmation of a global trend higher. Meanwhile yields will tell us if the economy here at home continues to improve, and how Wall Street feels about the Fed’s taper plans.

I know there’s a lot to keep track of and analyze this year, but that’s what we’re here to help you do each week — so be sure to come along for the ride in 2014.