What Could Ensure a Good Stock Market Performance This Year

One stock market sector that’s been surprisingly strong in spite of mixed earnings has been technology, with the NASDAQ recently hitting a multiyear high. There have been a lot of mixed earnings among large-cap technology companies, but the stock market trend for that sector has been higher, largely due to reasonable valuations.

Case in point, Oracle Corp. (NASDAQ/ORCL), which is always early in reporting its earnings. The company disappointed investors with its earnings results, but the stock still ticked higher at the beginning of January. Intel Corp. (NASDAQ/INTC), on the other hand, slightly beat the Street and its share price has been very strong since the beginning of the year. Other large-cap technology companies are also doing very well on the stock market, even if their earnings have just met expectations. Like I say, it’s the change in investor sentiment and the reasonable valuations that have driven this sector.

 We’ve had a very good start to the year and this bodes well for the near-term outlook. We’re now in the lull between earnings seasons and the stock market will be focused on economic news and other factors. You’ll notice that the policy action and statements by the Federal Reserve have been awfully accommodating lately. In my view, it’s all part of the election year policy facade that wants to goose financial markets and create a general environment of rosiness and certainty. It’s highly probable that this will be a good year for the stock market—it usually is during an election year. There are also a lot of other important elections throughout the world, so I think it’s fair to assume that the euro currency and the European sovereign debt crisis won’t come apart this year. Of course, this means that the you-know-what might hit the fan next year. (See The Cycle of Debt Must Be Broken for the Whole System to Correct Itself.) Regardless, policymakers are trying as much as possible to stack the deck this year. It’s human nature, I suppose.

 As odd as this sounds, I’m less worried about last year’s shocks affecting the stock market going forward. We have solid earnings, a decent corporate outlook, and improving economic news to go on. With the Federal Reserve in lock step with the current administration (right or wrong), I’m more worried about the geopolitical nightmare of Iran and the other powder kegs in the Middle East. This to me is the most important investment risk for stock market investors this year (not a slowdown in earnings) and it warrants a conservative portfolio stance and a healthy dose of protection (e.g. exposure to gold).

 Institutional investors are happy to be buyers in this market. They’ve been waiting for a catalyst. I suppose the news from the U.S. central bank that interest rates will be kept low (artificially, I might add) going well into 2014 was the catalyst for January’s strong finish. This kind of monetary stability is unprecedented in recent history. Greece might default this year and this would be a shock to the stock market, but Greece’s economic influence in the eurozone is limited and therefore any potential reaction in capital markets shouldn’t be severe.

 My read from fourth-quarter earnings season was that corporations are expecting solid, but reasonable earnings growth this year. Corporations are rightly being conservative with their outlooks and expectations. The cash hoard will continue and the health of corporate America will continue to improve. It’s going to be a wacky year for the stock market and other capital markets. The politicians will certainly see to that.