Will the economy and the bull market make further strides next year? On Wall Street and Main Street, 2013 turned out better than many analysts expected. Will the recovery gain additional momentum in 2014, and will stocks climb even higher?
Optimism is widespread. Do you remember how gloomy things got at the end of 2012? Fears about imminent economic damage from the fiscal cliff and sequester cuts were pervasive, and bears sensed that stocks might retreat. The economy and the market withstood these anxieties and others. Look at last week for another example. Hours after the Federal Reserve announced it would scale back its asset purchases next year, the Dow closed at a fresh all-time high of 16,167.97. Dec. 18 was the index’s best day in more than two months.
Weren’t investors supposed to be disappointed when the taper occurred? Let’s just say the timing was right. In August, just the hint of an oncoming taper resulted in a 5.6 percent dip for the Dow. Months ago, some investors were still questioning the strength of the recovery. Today, there is less to question. As Wells Capital Management chief investment strategist James Paulsen commented in USA TODAY, the Fed’s move amounted to a “vote of confidence in the future,” mirroring the confidence on Wall Street.
The taper to Quantitative Easing (QE3) was relatively small ($10 billion) and came with a pledge to hold interest rates down “well past the time” unemployment declines to 6.5 percent. So the Fed likely intends to maintain its accommodative stance for some time, which is just fine by investors. (In fact, the Wall Street Journal says that only two of 10 Fed officials believe the central bank will raise interest rates next year.) The Fed’s monetary policy has been instrumental to the stock market’s record-setting performance, and it isn’t going away – which is good news for 2014.
Easing isn’t the only thing powering this bull market. The unemployment rate fell to 7.0 percent in November, a five-year low. It was 7.9 percent in January. The economy is projected to generate 2,269,500 new jobs in 2013, and assuming it does, this will be the fourth straight year with a gain in annual job creation. The Fed sees Gross Domestic Product (GDP) improving more than half a percentage point to 2.8 to 3.2 percent in 2014 and growth of 3.0 to 3.4 percent for 2015. Housing starts have doubled in the past four years and rose 22.7 percent in November to a 5 1/2-year peak. The most recently released Case-Shiller Home Price Index (September) showed a 13.3 percent overall annual gain in home values, and even though year-over-year existing home sales declined in November for the first time in 29 months, the National Association of Realtors said existing home prices had improved 9.4 percent in a year.
The global outlook may also improve. Economists at China’s National Academy of Economic Strategy feel that the People’s Republic of China (PRC) will maintain GDP of about 7.5 percent this year and see as much as 7.8 percent growth in 2014. Citing Eurostat and Bloomberg research, Money reports that the eurozone economy is projected to grow about 1.4 percent per year for the next three to five years, notably better than the annual 0.2 percent pace of expansion recorded so far in this decade.
No one is saying there won’t be challenges or surprises next year, and stock market gains in 2014 may not approach those we have seen in 2013. That said, many indicators are signaling that next year could hold considerable promise for Wall Street and Main Street.
Brad Ledwith is a certified financial planner and runs his own wealth management firm in Morgan Hill. He is a registered representative with and offers securities through LPL Financial, member FINRA/SIPC. CA Lic. OC69547. If you have financial questions you would like to have answered in this column in the future, email br**@le**************.com.
