After Dow 14,000, what happens next?
The odds favor the market trying to set new highs in the next few months. But for stocks to continue to move higher, a number of factors will need to fall into place.
So what happens next?
In the short run, there will be an assault on the closing highs the Dow and the Standard & Poor's 500 Index ($INX) set on Oct. 9, 2007 -- 14,164.53 for the Dow and 1,565.25 for the S&P. The Nasdaq Composite Index ($COMPX) may have risen 150% since bottoming in March 2009, but it's still a long way from its all-time high of 5,048, set on March 10, 2000. The Dow has risen 6.9% for the year, with the S&P 500 up 6%. The Nasdaq is up 5.3%. The Dow finished January up 5.8%, its best January since 1994. The S&P 500's 5% gain was its best for a January since 1997.
Confirming that the assault will occur are gains among stocks in the Dow Jones Transportation Average ($DJT) and the Russell 2000 Index ($RUT).
But what happens, say, for the rest of 2013 depends on a lot of factors, including:
The capacity of the Obama administration and Congress to negotiate a budget deal that prevents sequestration. This is the mandatory imposition of 10% spending cuts. Deep and abrupt spending cuts will harm the economy. Period. But it is not clear if sequestration will be avoided. It looks like the Republican leadership in the House wants to avoid sequestration because they know the economic consequences could be nasty and they'll take the blame.
A continuation of the economic recovery. This obviously assumes sequestration is avoided. Most of the economic reports in the last two months suggest this is possible. Manufacturing looked like it was regaining some momentum in December. Auto sales in November, December and January were quite robust. Homebuilders are saying they are seeing a fair amount of demand. Many markets saw prices increase in 2012. Friday's jobs reports was both downer and source of cheer. The downside of the report was that the economy may be creating jobs, just not gobs of jobs. An upside of the report is that construction employment, which collapsed in the recession, is starting to gain some steam.
Dare we say it, some pullback in stocks. While a Dow above 14,000 makes people feel better about their finances and is welcome news, the market almost certainly will see some pullback. It's necessary to remove some of the froth that has built up in recent weeks. A market that goes up without a break is asking for trouble. Many numbers now suggest the pullback may come relatively soon.
The Federal Reserve. The Fed has enabled the huge rally since the market bottom of 2009 by keeping interest rates low. The central bank says it won't start to raise rates until unemployment falls below 6.5%. With the unemployment rate at 7.9%, there shouldn't be any worry the Fed will suddenly start raising interest rates until 2014 at the earliest.
China and Europe. One of the biggest concerns for just about all of 2011 and much of 2012 was that economies in China and Europe were about to fall apart. China appears to be growing again. Europe may be stabilizing. But the pain has been enormous. Unemployment rates in Greece and Spain are 26.8% and 26.1%, respectively.
Energy prices. Crude oil in New York hit $97.77 a barrel on Friday and is up 6.5% this year. Gasoline prices are up more than 5%. They are a big risk to the recovery and to stocks because they can quickly curb consumer spending growth. Officials at Wal-Mart Stores (WMT) watch fuel prices carefully.
Corporate earnings. So far, the fourth-quarter earnings season suggests earnings are growing, just not robustly. Earnings growth for the fourth quarter is now projected at 3.8%, according to Thomson Reuters, a bit of an improvement over the last few weeks when growth was estimated at less than 3%.
Companies due to report results next week include Yum Brands (YUM), Walt Disney (DIS), Chipotle Mexican Grill (CMG), Visa (V), Starwood Hotels & Resorts (HOT) and AOL (AOL).
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