Stocks hit new highs in 2013. The Dow Jones Industrial Average rose 26.5%. The S & P 500 was up 29.6% and the NASDAQ was up 38.3%.
Will 2014 be a repeat?
Economists I monitor, Brian Wesbury of First Trust, and Milton Ezrati of Lord Abbott both expect to see the market make more gains in 2014.
Maybe you have heard rumblings that there will be a market pull back. As Wesbury says, “There will be plenty of news stories in 2014 to support bearishness no matter your political perspective, whether it's the continued rollout out of Obamacare for conservatives or” austerity “and inequalities” for liberals. But, in the end, stocks are the best broad asset class for 2014. ”
While both economists expect some market correction, both believe the market will finish the year 10-15% higher that where we began. Why do they feel this way?
The underlying facts support it. 30% of the gains made this year is due from company profitability; 70% from increase in valuation of companies. Profitability will likely continue as the economy continues to gain strength. Undervalued stocks will be harder to find because of the market run up in 2013.
The level of consumer debt has dropped over the last 6 years. With fewer dollars owed to loan payments, there is more disposable income. Some economists would even say the consumer is ready to begin re-leveraging. While this may expand consumption, as a financial advisor, I would encourage continued debt reduction and building cash reserves.
Home starts are picking up. As a nation, we are well below the average of 1.5 million home starts per year. Home building has a ripple effect – new homes need new appliances, new TV, new furniture, landscaping, etc. As a financial planner, I anticipate disposable income being consumed by these products in the first 2 years of a home purchase. Even in downsizing, retirees often make new purchases to get furniture that better fits their smaller home.
Within the US, vehicle sales are approaching their normal range of sales of 15.5 million per year. However, car sales overseas continue to expand as the middleclass of emerging countries is expanding.
Fracking has opened up more oil and natural gas fields for production. By 2016, the US will likely be a net energy exporter. Again this growth has ripple effects to companies surrounding the new drilling such as storage, transportation and pipelines.