Wealth Matters: Divining a 5-Year Investment Strategy

Today, after a year in which the Standard & Poor’s 500-stock index rose almost 30 percent, there are plenty of views on what the next five years might look like, but they’re not in agreement. Plenty of people question whether the next five years can be as good as the last five. They base their concern on stock indexes setting records, while other parts of the economy, like jobs, continue to lag. On Friday, the S.&P. 500 closed at 1,831.36.

Other people see the fundamentals of United States companies as so solid that stocks will continue to do well despite their large run-up. “I think we’re in for a long bull market and economic expansion that will be a little longer than average,” said Marty Sass, chairman and chief executive of M. D. Sass, which manages $6 billion. “That’s my best guess.”

When you’re looking out three to five years, guessing would seem to be part of it. While the one-year predictions I wrote about last week can be thrown off by an unexpected event or two, the medium-term view should be based on economic and corporate fundamentals, whether the prevailing mood is as dire as it was in 2009 or as cautiously optimistic as it is today.

This is where my interest in the three- to five-year investment outlook comes in. Back in 2009, the economy could have continued getting worse for longer than it did, but it would have turned around at some point. Today, some investors have the opposite concern, that the good times have run too long and there is a correction coming.

Regardless of whether a correction comes or not, this is where the medium-term projection should have value. Instead of reading tea leaves, it should be able to assess tectonic shifts. So now that we’re in 2014, I wanted to consider what investment strategists think the near future could bring.

TRENDS Some of their views are very broad — like stocks continuing to do well because of solid corporate earnings, low inflation and little pressure to raise wages given how high unemployment remains. But other views are based on stories that could play out for far longer than five years.

Production of oil and gas in the United States, for one, is expected to be stronger in five years. This is based on proven reserves and new drilling techniques. Saying what will happen in six to 12 months in this industry, though, is always difficult: A pipeline could explode, turmoil in the Middle East could impact prices, or regulation in Washington could cost companies more money. Longer term, the issue is supply and demand.

“We’ve discovered through this shale drilling how to exploit much more natural gas than we ever thought we could,” said Kent Croft, chief investment officer of Croft Leominster. “Have all the stocks been the greatest this year? No. Do I expect them to outperform over time? I certainly do. I think this is one of those watershed moments in the U.S. economic outlook.”

The mobile technology sector is another longer-term play. Mr. Sass said payment processors like PayPal were set to increase their processing of payments online but also to reach more into retail stores. And, of course, more of everything is moving to mobile devices, and companies are going to look to profit from that.

In other industries, like airlines and television broadcasting, consolidation is going to make stronger companies over the medium term. “These are industries that have gone from horror shows to very compelling plays,” Mr. Sass said.

RISKS There are plenty of risks to the medium-term view. Kate Moore, United States chief investment strategist for J. P. Morgan Private Bank, said her clients generally had concerns about three big themes.

They worry first, she said, about how much higher equity prices can go. After four and a half years of prices going higher, they ask her when the rally is going to end. “This is where we’ll walk them through corporate fundamentals and show them balance sheets and how margins can be sustainable,” she said. “We find that most valuations are below 10- to 15-year historical norms.”

This article has been revised to reflect the following correction:

Correction: January 3, 2014

An earlier version of this article misstated the title of Katie Nixon.  She is the chief investment officer at Northern Trust Wealth Management, not the chief investment strategist at Northern Trust.