KC Mathews: It's sequel time
UMB Chief Investment Officer KC Mathews has dubbed this year the “The Sequel” in terms of what he expects from the economy and the markets in 2014. That is, an extension of the slow to moderate growth seen in 2013 – with a chance of improving on that.
“We’re thinking about 2.4 percent real GDP growth in 2014, a little bit better than the 1.8 percent growth in 2013,” Mathews said in mid-December. Keeping with the cinematic theme, he added, “The sequel’s going to be better than the original – a better ending where you have more growth and activity in the economy. The only thing I don’t know is if you can beat the (2013) returns in the stock market.”
Mathews headed up a roundtable discussion last October that included CEOs of ColoradoBiz Top Company winners. UMB, which is based in Kansas City, Mo., and has significant banking operations in Colorado, sponsors the annual Top Company retreat held in California’s Napa Valley. It’s both a reward for leaders of winning companies and a chance to share business and economic insights.
“I learn a lot from them,” Mathews says. “Sometimes it validates our research, and sometimes it makes us scratch our heads and ask, ‘What are we missing?’ It’s a great tool for us to spend time with these business owners and find out, for example, ‘Are you thinking about hiring people? What about your capital expenditures? Are you going to spend money to buy new trucks, new equipment? Are you going to finance it or use retained earnings?’ It’s a wonderful experience for us.”
One reason for Mathews’ mildly optimistic outlook on 2014 is consumer confidence; he notes that consumer spending makes up about 70 percent of the GDP calcuation.
“Consumer confidence, really since the end of the Great Recession back in 2009, has been on a very nice glide path upward,” he says. “The trend is very positive. That should be somewhat intuitive when you look at things like household net worth. One thing that drives that is the wealth effect: When we feel wealthy, we spend money.”
Mathews cites home values – up more than 13 percent in the Case-Schiller 20-city index in 2013; and the stock market – the S&P 500 was up 30 percent last year.
Despite last year’s stock market increases, Mathews believes there is room for more. He pointed out in December that stocks were trading at 16½ times earnings, compared to the historical average of 16. But in periods of low interest rates and virtually no inflation, the average multiple was 17 to 19 times earnings.
Thus, Mathews said, “We’re still very positive on the stock market. The one thing I will throw out when I’m talking to our clients is to remember that we’re long-term investors. We try to look for long-term trends. That’s not to say we won’t see a correction in the market at some point. We haven’t seen a meaningful correction – a 10 percent correction – in over a year. So we could see some bumps in the road here, but I think by the end of 2014, barring any wild cards, you’ll get to low double digit (gains) in the stock market.”