No one can forecast with certainty what the economy and stock market will do in the future but investors can form reasonable expectations for the purpose of making smart tactical asset allocation and investment moves with their portfolios.
Economic Outlook 2014: Politics, the Fed, and Interest Rates
The stock market is a leading economic indicator, which means that stock prices tend to move in the direction the investor herd expects the economy to go in the next 3 to 6 months. Coming off the best year (2013) for stocks in 15 years, it doesn't look as if investors are pricing in a poor economy in 2014. However, that positive sentiment can change.
What can make investors turn sour on the economy in 2014? For one, there is still a divided Congress and the US political divide is as pronounced now as in any time in recent history. This means more bickering and political maneuvering ahead of 2014 Congressional elections, which can translate into another debt ceiling standoff early in the year and leading up to February 7, which is the looming deadline for raising the debt ceiling.
Although these standoffs are nothing new to investors, uncertainty over the potential for short-term economic damage still looms and uncertainty is the investor's worst enemy (other than him or herself, of course).
Adding to the uncertainty for the economy is the new Federal Reserve Chairperson, Janet Yellen, who may or may not continue the relatively predictable path of her predecessor, Ben Bernanke. If she remains on the planned "tapering" of US Treasury Bond purchases, investors may perceive Yellen as somewhat of a Bernanke continuation, which will remove some uncertainty. However, if she has different plans (e.g. faster tapering) that are not foreseeable, the market can react quickly and decisively in the negative direction.
Regardless of Yellen's style and transparency as new Fed chair, investors are still faced with the prospects of rising interest rates, which has the effect of pushing bond prices lower and cutting into corporate profits, which puts downward pressure on stock prices as well.
All of this is amongst a backdrop of a moderately healthy, yet not completely stable, economy. US economic growth, as measured by Gross Domestic Product (GDP), is estimated to come in at around 1.9% annualized rate for the fourth quarter 2013, which is down from 2.8% in Q3.
Across the Atlantic, Europe appears to have entered the early stages of a sustainable recovery.
Stock Market Outlook 2014: An Aging Bull, Consumer Spending and Alternative Investments
Although Europe may be in the early stages of economic recovery, the US is almost certainly in the latter stages of its cycle, which is partially made evident by an aging bull market for stocks. Depending upon which time period you analyze, most bull runs are longer than 3 years but shorter than 4 years. The current bull market will turn 5 years old in March 2014, assuming it continues.
No matter how strong or weak the economy, the mood of the consumer will be the largest deciding factor for growth and corporate profits, and thus stock price movement, for 2014. Consumer spending represents roughly two-thirds of the US economy. Therefore, if consumers keep their wallets open, 2014 could prove to be positive. But, like stock prices, the mood and behaviors of the consumer is not easy to predict.
With significant stock price growth becoming increasingly difficult to imagine and bond prices set to have another lackluster year, some investors may be looking to diversify into sector funds or alternative assets, such as commodities.
I'll provide more specific thoughts and these ideas in other where to invest now articles.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.