5 reasons the markets will rally again in 2014

Forget the gloom-and-doomers. Here's what will drive the ascent in the new year.

By Traders Reserve Dec 4, 2013 1:54PM

Image: New Year celebration © Stan Fellerman, CorbisBy Jamie Dlugosch


It has been a glorious time for investors, at least those that believed in the market.


I’ll admit to having some skepticism heading into 2013. When I offered my Top Stocks to Own in 2013, it was on the heels of my 2012 picks generating 40% for the year. I have enough respect for the market to know how difficult it would be to repeat that performance. So, I hedged by suggesting that I would do only half as well in 2013.


Now, 11 months later, that list of 10 stocks for 2013 stands at an aggregate gain of 57%. It’s enough to make your head spin. More importantly, one can rightly question if such good fortune can continue.


If I was hedging my bets in 2013, I will surely hedge my bets for 2014, right? Not so fast. The animal spirits are stirring and one can easily conjure a scenario for more gains ahead.


OK, I’m pretty sure any list of 10 stocks will be hard pressed to gain more than 50%, but unlike the bubble maniacs and their doom and gloom expectations from here, I think it is most reasonable to assume more gains in 2014.


How much more depends on a number of factors, but there are a few things this market needs to continue in rally mode. Here are five of them:


The Federal Reserve

So much of what transpires in the market depends on the policies of the central bank. Frankly, I don’t think the average investor fully appreciates just how important that policy is to a rising market. At the moment that policy is highly accommodative to growth and future stock gains.


More importantly, we are in the middle of a transition to power that will likely ensure smooth sailing for at least the next six  months. There have been few key policy changes when power changes hands and this time should be no different. That means we have up to and through the time the new chairman takes helm at the end of February. Specifically, one can expect continued buying of bonds until early summer. If so, that should boost the market another 5% to 10%.


Fear in the market

Every good bull rally requires a healthy dose of fear. It is quite true that the market climbs a wall of worry. That wall of worry was in the spotlight recently when everyone and their brother seemingly expected stocks to crumble. Instead we broke through key psychological barriers with minimal resistance.


It really is remarkable how many non-believers are out there. I say fantastic, and the more the better. As long as there is fear in the market, this market can and will continue to rally.

 

Fund flows

For stock prices to continue their ascent we need buyers, and those buyers are likely to come from some surprising sources.


I can think of one really big source that should the flood gates open, we could see the market gain 20% in the next 12 months. What source could that be? Think exchange-traded funds. I won’t say these Wall Street manufactured devices are a fraud, but they are close. Born out of fear, these devices attracted billions of dollars in assets. Many of those assets were directed to fear-based or inverse exchange-traded funds – inverse in that they will perform well in a down market.


How did that inverse bet go over the last two years? Not very wel,l and when these folks pull the plug on these inverse funds they are likely to move into equities. Nobody wants to miss a rally after all, and these folks are no different. Fortunately for us, there are huge dollars in these funds that could easily push stock prices higher.


Compelling valuations

Perhaps it's shocking to some, but valuations do ultimately matter. For stocks to stay in rally mode, valuations need to be compelling. This is not the heyday of the dot-com, thankfully. So far, appreciation in stocks has not yet resulted in the sort of valuations that can derail a bull market. In fact, I’m putting together my list of stocks for 2014 and I’m having no trouble finding compelling opportunities.


Considering I follow mostly fundamental valuation metrics and buy accordingly, I would say that stocks in general are still reasonably priced. That is not to say we won’t have moments when stocks pause or even take a step back, but overall there are still plenty of reasons to want to buy stocks even at current levels.


Stable geopolitical climate

Say what you will about President Obama, but his foreign policy seems to be doing the trick and all of that is positive for stocks.


The recent agreement with Iran paves the way for another several months of smooth sailing, at least in the Middle East. The bigger trouble might be in the Far East. Chinese claims in the Sea of Japan run the risk of derailing this stock rally. The fact that the dispute amounts to a fight over a pile of rocks is meaningless. Wars have been started over far less. So far the market has not paid much attention to the issue, but it is just the sort of thing that could halt stock buyers in their tracks. Hopefully that doesn’t happen and we continue on in geopolitical harmony. If so, one can expect investors to be buying stocks.


More from Traders Reserve

 

62Comments
Dec 4, 2013 3:36PM
Dec 4, 2013 4:13PM
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This is the same type of pyramid scheme hype that kept the 2007 housing bubble going ... for a while... until it blew-up in their faces.
Dec 4, 2013 4:30PM
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"To print...or not to print, that is the question

Whether is nobler in the mind to suffer the consequences of foolish actions or,

to take up the printing press against a sea of data, and by opposing,

kick the can

To die, to inflate no more. And by 'inflate' we say we end the heart ache and the thousand

natural shocks a realistic stock market is heir to

To die, to inflate, to inflate perchance to ruin lives.

Aye, there's the rub

For in that inflation of death, what solvency may come

when we have shuffled off sound fiscal management

Must give us pause...

OR NOT!"

                 -Benny "The Counterfeiter" Bernanke

Dec 4, 2013 2:24PM
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Sure the market will rally... after a 15%-20% fall. We will be lucky if the market ends 2014 above where it started. Remember that if you adjust for inflation the market is barely if at all above 2000 levels.
Dec 4, 2013 3:18PM
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I directly CHALLENGE the powers that manipulate to keep the stock market high and precious metals low for another year....go ahead, make my YEAR!
Dec 4, 2013 5:16PM
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Too bad the stock market is not outlining the next wave of mortgage loan defaults due to the variable rates reset deadline looming in a few months....then again, the rich want to sell high before that happens, so BUY NOW!!!  Think how delighted you'll be next year to own a $7 stock you bought today for $23...and how many shares did you buy?  Champion!
Dec 4, 2013 7:29PM
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Just look at the panic when they simply whisper about a tapering of QE.
To think this is actually based on a good economy would be utterly foolish.
Dec 4, 2013 5:00PM
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Won't hope n change keep the market going ?
how about change you can believe in ?


Dec 4, 2013 4:41PM
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"5 reasons the markets will rally again in 2014"

 

He said with confidence, as that tiny drop of sweat started to form just above his brow.

Dec 4, 2013 5:54PM
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Or maybe the market will have to swallow that bitter pill known as the end of QE, assuming the economy is healthier than most of us think.
Dec 4, 2013 3:30PM
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This is the Mother of all Bull Markets. It has a long way to go, and 2014 will be another great year because:

1. By any metric, stocks are cheap.

2. The Fed will keep the pedal to the metal spurring the recovery!

3. A recovering economy means increased consumer and business demand.

4. Corporate earnings are swell and will grow as the economy recovers. 

5. Increased earnings at current multiples = higher stock prices.

6. In regard to #4, as investors jump into the market, multiples will expand. 

7. Current data like autos, housing, and employment are all good and improving.

This business cycle is like any except a bit more protracted. When the economy turns downs, business cut costs. Since labor is a major cost it gets cut first. Next employees will be pushed to their limits to increase productivity, and every possible means will be examined to keep the company alive during the recession. Employers aren't cruel;  they are practical. As a result, coming out of a bad period, companies are lean and mean and positioned to make money in the ensuing recovery. 

Finally there comes a point that companies begin hiring again to meet increased demand. Consumers and businesses are fat and happy, and we are off to the races until the next downturn. Right now we are in the sweet spot of a recovering economy!

Yuk yuk!   
Dec 4, 2013 3:10PM
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ahaha, yes forget the doom and gloomers....jump right in the water's great! Meanwhile back at the precious metals camp.....we're all getting rich, well, at least hedging QE injection inflation. Agreed, after the 35% market sheep shearing correction...in Dec thru March....the rest of 2014 will look good for a steep rise in the stock market. So, bottom line, I'll agree with the article 2014 will be a banner year for stocks and for those on the sidelines waiting to get back in.
Dec 4, 2013 7:41PM
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 Think pro market propaganda would endlessly spew from this democrat Nazi scum rag under a republican? This is comical the ULTRA RICH collecting welfare and the liberals all clap for more of it? I wonder how Joe six pack feels about the truth? The average blue collar democrat has the lowest labor participation rate since 1978 150,000$ per "working" American of national debt. Perhaps the entire democrat party is nothing but corrupted slave masters. Very close to the brand of class warfare that is taught to democrats except the scum is really their own party.
Dec 4, 2013 6:06PM
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We don't know if the market really exists.  You just see some talking heads and images on T.V. and your other devices.

It is the reality of the blue pill whose ingredients are 0s and/or 1s.

FOR GOD'S SAKE MAN --- take the red pill and plant something in the dirt.

Dec 4, 2013 4:59PM
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Our dire financial circumstances won't register until the middle class logs onto their 401K's and see their balance at 60% of what they expect and falling...well into next year.


Dec 4, 2013 5:12PM
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what a complete, fictitious crock ...

 

1. the tapering could begin as early as this month since bernanke and the out-going governors may not want to end their terms without deciding on this issue - and they recognize that the QE program only helps the economy at the margins ...

 

2. the aaii sentiment survey shows bullish sentiment at very high levels and bearish is very low - the vix is very low - fear is very low and complacency is high - and you didn't do your research for this article

 

3. the inverse funds do not have huge asset bases - they are in the tens or hundreds of millions while current long-equity funds are in the tens or hundreds of billions - again, no research done

 

4. future earnings will decrease as gdp lags and deleveraging couples with higher interest rates - you are dreaming about the multiple fantasy here

 

5. that's pretty funny while they are toppling the government in thailand and protesting throughout the ukraine and china is a much more volatile situation than you know or indicate

 

sounds like an author trying to protect his gains or sell a newsletter service to me ....

Dec 4, 2013 7:58PM
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No no no, lets not scare the markets and just continue our addicted, drunk obsession on the QE. Someone else can handle it (sarcasm).
Dec 4, 2013 7:56PM
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If there truly was fear in the Markets, it would have fallen dramatically by now. Fear only matters when those with the Big Money are selling Everything. Stocks are not compelling valued but buying on Margin has set a new Record. There are a Mountain of REAL issues coming due the next few years so the Markets rallying doesn't reflect a darn thing about Fundamentals. Something this guy clearly knows nothing about it. It's always that buy and hold to infinity mentality, he would have sold out everything long before he tells you to do the same.
Dec 4, 2013 5:46PM
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Reason #1 the market will rally again in 2014 ...  because it will crash at the end of 2013 ...
Dec 4, 2013 6:08PM
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Jamie,

 

I imagine you are right the market will rise,  but what century???   Or, are you just selling your stories to the dumbo public?????????

 

I know of a juo on a dairy farm if you would have interest.  However when milking the cows you will have to learn to keep your mouth shut when behing the cows or they might fill your mouth full of the same stuff you are selling.

 

Have a good day.

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