The Road Ahead

Our split week last week had the closing of one of the best years for the stock market in some time.

The Dow had its best year in 18; the S&P, it’s best result in 16. The NASDAQ did its best since 2009. (1) Using the S&P as a reference, the US market has now recovered 130% since its lows – the best of all developed markets by a bunch over that period.

So, as is typical at the end of any market year – but especially now with those results – investors have a strong desire to know how this new one will compare. What’s for sure is that no one will call it exactly. Nonetheless, many market strategists and “pundits” are more than willing to share their visions with us. I’ve read through a lot of these and will share their general conclusions with you to help you decide how they may best help with your investing decisions.

In general

There are a few common thoughts for the coming year that appear to be in most of the prognostications that I’ve seen. Those were best summarized by Sam Stovall, chief equity strategist at S&P Capital IQ who says, “based on our statistics, good market years tend to follow great market years.”

The vast majority of analysts seem positive, though I did find one dissenter. Peter Boockvar, managing director and chief market analyst at the Lindsey Group, said that US stocks can’t go straight up forever. He added that, “the market could suffer a significant correction this year as the Federal Reserve starts dialing back its stimulus.”

In no particular order, the majority see solid earnings growth continuing and the Fed will maintaining an easy money policy into 2015 – good for stocks -not so good for savers. In addition, many see higher levels of volatility, with modest economic growth.

Most also see interest rates rising slightly this year though none I’ve read see it as a reason for concern. As Dr. Jeremy Siegel, author of “Stocks for the Long Run”, recently stated, “If higher interest rates are due to a stronger economy, then that is not bearish for stocks.” I agree with that.

Economist Dr. Scott Grannis believes that, tapering and reversing quantitative easing (QE) will “contribute to growth in the economy as uncertainty about monetary policy will be reduced further.”

Concerns

There are two major issues that come up with some frequency.

Along with Mr. Bookvar, there were a number of comments that we’ll have a correction of, at least, 10% sometime this year, with the attendant rise in volatility. I don’t think that’s too far a stretch as we haven’t had one of that type in some time now. Sam Stovall said it’s been 27 months since our last one. I must add that a number of people, like Bob Doll of Nuveen Asset Management, look for the market to recover from any correction such that the year overall is another good one.

Please recall that corrections are a usual and normal part of market cycles. Please also be aware that history suggests that corrections can happen without there being major economic or financial catalysts. Use this as your early warning note so that you don’t act against your own best interests if and when one does arrive.

The other concern is the presidential election cycle. Simon Constable of the Wall Street Journal says that since 1945 – regardless of party and with no distinction between a first and second term – the second year of a term will have sub-par results, especially as compared to the third year. This could also add to the volatility mentioned before.

Secular bull

I strongly believe that we’re in what Dr. Ed Yardeni and many others refer to as a secular bull market.

This is a market that is driven by economic forces that could be in place for many years. On the other hand, a cyclical market – bull or bear -tends to be a couple years. In a secular market, stocks tend to rise more than they fall as declines get made up with subsequent increases in market values. You can (will?) have a bear market within such an event and not change the overall direction of the secular trend.

As the economy continues to improve and convince the doubters, and as various sectors such as housing continue to lead the recovery, we’ll see more money come into the market. Tie that with good valuations, relatively low interest and inflation rates and improving employment numbers, and you’ll get further motivation to participate.

Cheers!

Mike

509-747-3323
(1) CNBC, 31 Dec 2013

(2) Ibid

Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

To get an overview of economic conditions, use this link. It’s updated monthly.http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx

Past performance is not indicative of future returns.  Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.  Investing in sectors may involve a greater degree of risk than investments with broader diversification.

Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.