Wednesday, January 1, 2014

Stock Market: 2014 - Another Year Of The Bull?

(Drivebycuriosity) - Hollywood loves serials, almost every blockbuster leads to a sequel. Maybe Wall Street does that too. Maybe the U.S. stock market will deliver a sequel to the blockbuster year 2013 (S&P 500 plus 30%). Will the rally of 2013 continue in 2014?

Nobody has a crystal ball to answer this question. But there is a high probability that the positive developments of 2013 will continue this year. The trend maybe your friend.

It seems the U.S. economy entered a virtuous circle. The job market is healing, creating more income, and the falling jobless rates reduces the risk of losing ones job and raises the optimism of the consumers & investors. The stock market rally and climbing home prices both lift the wealth of many Americans which causes them to spend more (wealth effect). Rising consumer spending translates into climbing company profits and a strengthening of the economic upswing which should lead to more gains on stock & home markets.

The U.S. economy also could get some tailwinds from the recovering economy in Europe. The headwinds from (rising) interest rates should be contained thanks to the wary monetary policy of Janet Yellen and the U.S. Federal Reserve. The rising U.S. oil production also should keep the oil price at bay.

What does that mean for the stock market in 2014? Last year the valuation of the S&P 500 has swelled to almost 17 from 14, meaning that the stock market costs now around 17-times the trailing 12-month earnings ($108) (bloomberg  advisorperspectives). This is a return to the historical average valuation and a comeback from the depressed valuations of 2011 and 2012.

History shows that stock markets often tend to over or under shoot the historical average. What if when companying earnings will rise this 10% to $119 thanks to the stronger global economy and high company spending (investments) of the recent years? What if when investors get more optimistic and the S&P 500 valuation will expand to say 19 - as it often has done in the past? Then the S&P 500 would climb onto 2,260 points. This would be another gain of around 22%.

Happy New Year to everyone!

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