Will 2014 Bring Calmer Economic Waters For Markets?
Eventually, The Economy Needs To Step Up
The Federal Reserve has been doing the heavy lifting in the stock market for longer than they care to admit. In order to declare their quantitative easing program a success, the Fed needs the economy to pick up, allowing the central bank to taper their way into a less meaningful role.
Detroit On More Solid Footing
The Detroit Auto Show provided some insight into the health of the 2014 economy relative to the dark days of the financial crisis. From The Wall Street Journal:
Detroit's weather promises to be chilly and dank as ever. But the U.S. auto industry is enjoying blue skies. Sales in 2013 recovered nearly all the ground lost during the Great Recession in 2009, as demand for luxury cars and highly profitable trucks and sport-utility vehicles boomed and gasoline prices drifted down. The pace of growth in 2014 will slow, but most industry executives expect smooth sailing for the near term compared with the turmoil of recent years.
Fundamental and Technical Alignment
Is everything perfect in the world? No, far from it, but just as the auto industry is on firmer footing these days, the same can be said for systemic issues, the global economy, and the market's technical profile. This week's stock market video examines numerous risk-on vs. risk-off ratios that continue to point to bullish economic and stock market outcomes over the coming months.
Will Harmony Bring Better Results?
Forecasting is difficult. Since 2009, economists around the globe have predicted "better days ahead" only to be rebuffed by tepid economic data. The odds say the 2014 forecasts may land closer to the actual mark. From The Economist:
The central bank's crystal-ball-gazers expect growth to reach 3% this year; private-sector seers say 2.8%. Recent experience calls for skepticism. Almost every year since 2008 both the Fed and private economists have predicted an uptick, only to be disappointed. This year, however, they disagree less about the prospects for unemployment and inflation. Such harmony usually foreshadows greater accuracy, according to Goldman Sachs, a bank.
Investment Implications - Stocks Still Favored Over Bonds
The monthly labor report cast some doubt on the "2014 will be different" theory, but as we noted last Friday, the market's pricing mechanism was still favoring stocks over bonds. If you are wondering if the answer has changed in the wake of Monday's equity weakness, the answer is "not yet". Our market model will begin to check more risk-off-related boxes if the chart below morphs into a look similar to points A and B.
Is it possible stocks are on the verge of a correction? Sure it is, but until the evidence confirms a relevant shift in the market's risk appetite, we will continue to hold positions in U.S. stocks (VTI), financials (XLF), energy (XLE), technology (QQQ), small caps (IWM), Europe (FEZ), and global stocks (VT).