The Stock Market Needs to Do This in 2014 Before I Invest More in It

Why Investors Need to See It to Believe It in 2014This is an odd stock market. On one hand, you don’t want to miss out on any of the upward moves, which is why you should continue to ride the gains; on the other hand, you also want to make sure you have an exit plan in place. (See “Time for Investors to Create an Exit Strategy?”)

As we move toward the end of the first quarter, the one thing that is clear is the difference in the market behavior this year versus the same time in 2013, when everything was moving rapidly higher with minimal regard for the underlying market fundamentals.

As I wrote in these pages in January, this will be a more difficult market in which to make money compared to the previous few years.

The move by the Federal Reserve under Janet Yellen to continue to dismantle the quantitative easing that was put into place by former Fed Chair Ben Bernanke a few years ago has continued into 2014 with the third straight month of cuts to the central bank’s monthly bond buying.

The gradual $10.0-billion-per-month reduction in the Fed’s monthly bond buying will likely continue until the program reaches zero early in the fourth quarter, unless, of course, the economic renewal stalls.

What this means for the stock market is that the drying up of easy money from the Fed will continue to put a damper on the money available for speculating on stocks, especially those in the emerging markets. And as bond yields rise, there will be more of a shift to bonds.

We are already seeing the impact on the housing market as shown by a decline in new-home sales in February and a slip in month-over-month home prices. Now, the numbers are likely due, in part, to the horrible winter conditions, but we will now need to see growth as the weather improves; otherwise, there may be more problems ahead.

Now with the easy money abating, we need to see reasons for the stock market to rise to new heights. At the core is the need to see corporate America grow its business and revenues instead of the lackluster growth we have been seeing in the past quarters. Companies will soon have a chance, with the first-quarter earnings season to begin in a few weeks.

To convince me the stock market is deserving of its current levels, I also need to see the jobs market add jobs at a stronger rate and for activity at the factories in America to pick up.

It’s “show me” time now, as the stock market will no longer be able to depend on the easy money flow, but rather on more concrete evidence that the country will begin to exert its economic leadership around the world. Only with this can we expect sustainable stock market gains.

For investors, I’d suggest you ride the stock market, but also make sure you take some profits off the table, especially on some of your bigger gainers and higher-momentum stocks.

Opportunities in the stock market will come this year, but they will be less frequent.