In 2013, the Federal Reserve gave stock market investors some of the easiest gains in history as a result of its quantitative easing. Now, as we move into 2014, while I believe it will likely be another up year for the stock market, I doubt the gains will be as good as last year’s.
Let’s take a look at the situation in 2014.
Fed Chairman Ben Bernanke will be gone in a few weeks and in will come Janet Yellen, another dovish banker who loves to use easy monetary policy to drive the economy. This implies that the tapering process could be slow and could take into 2015 to complete—good news for the stock market.
But the reality is that the unprecedented flow of the Fed’s easy money into the stock market over the last four years is a thing of the past. The flow of money will now depend on the rate of economic renewal and, more specifically, the jobs market and whether the rate of job creation continues to move along at a steady pace.
Since the announcement of the Fed’s $10.0-billion-a-month cut in bond buying (which I believe is a sensible move at this point, given the current economic renewal and jobs market growth), some uncertainty has been removed from the stock market; as a result, the S&P 500 and Dow Jones Industrial Average (DJIA) have reached record highs. (See “Fed’s Move to Taper the Right Choice for the Stock Market in 2014?”)
If the economy continues to strengthen, jobs are created, and the Fed tapers slowly, the stock market could be rewarded for the fifth straight year.
For the broader market, the S&P 500 could rise to 2,100 for a 15% advance, or if we see more bullish sentiment, the index could hit 2,200 for a 20% gain. The small-cap Russell 2000 will likely do well, too (though likely not at the same rate as in 2013), as long as the economy continues to grow. On the blue chip side, the DJIA could drive higher to around 19,000 for an advance of 15%…if all works out.
The top area of growth continues to be technology, especially in the mobile and Internet areas, as the economy continues to improve. Unless the appetite for risk declines, I see potential gains in the NASDAQ in excess of that for the S&P 500 and DJIA.
I also like the financial sector, especially the banks, credit card companies, and providers of prepaid credit cards, as interest rates will remain low for a few more years, making purchasing on credit that much more attractive to consumers.
As far as foreign stock market opportunities go, I like China, an underperformer in 2013 for the second straight year; I sense China will deliver some better returns this year, especially in the technology and industrial areas.
In the commodities area, I continue to believe gold will underperform in 2014. Gold recently declined to below $1,200 an ounce and is hovering at just above that mark, but I’m not that positive. The reality is that many of the underlying fundamentals that have traditionally supported the metal are not evident. Yes, China is continuing to accumulate physical gold, but India, which is the world’s largest buyer, has shown some stalling in its buying of the yellow ore.
So continue to enjoy the stock market for now and use selling as a buying opportunity, as I sense the stock market will continue to deliver above-average returns for investors as we move ahead in 2014.