Stocks will rise in 2014

Founder and Publisher of the Switzer Report
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This is my early call for all investors – 2014 will be the year of living normally! Stocks will rise – that’s normal. House prices will rise – and yes that’s normal. Interest rates will start rising around the world, and maybe here too, and we will see more volatility on stock markets. Yep, this is what a more normal world, now five years away from the GFC, usually looks like and it’s about bloody time!

Of course, it’s a new normal as central banks are still pumping money into their economies, but these economies – from USA to Japan, to even Europe’s basket case economies, Spain and Italy – are starting to grow.

The law of averages

Growth is normal and it underpins company profits and then stock prices. That’s why we expect shares to rise in about seven out of 10 years, with a total return around 10% per annum on average. And “on average” is the important point. To make that 10% number, there can be two or three bad years, and then maybe three or four great years for stocks, along with some OK ones.

The USA had a great one last year with the Dow up about 30% – total return – while we had a good one with the S&P/ASX 200 up 15% without dividends and 20% with dividends. So, I guess it was a great year.

I expect the Yanks will have an OK year – mid-term election years aren’t historically great. Also, after US markets do 25% or more in one year, the next tends to be a 10% or so result.

For Australia, I am looking to see 6,000 on the S&P/ASX 200, which means a 650-point gain and that would mean a 12% rise plus 5% for dividends. So, if we gross up, I guess we’ve got another great one ahead.

On volatility, the USA did not have one pullback bigger than 7%, which is historically small. However, I expect some bigger ones this year as an improving US economy will get some investors worried about rising bond yields. That said, I expect the ongoing strength of the USA and global economies to keep pushing stock prices higher.

Why I am positive about 2014

• Brian Belski, the chief investment strategist at BMO Capital Markets in the USA, thinks we are into a 15-20 year bull market and so my expectations for another good year actually looks rather wimpy.

• But there will be volatility, with S&P Capital IQ showing that after a huge year like 2013, the next can be positive, but it can provide anxious moments. In fact, since 1945, the S&P 500 has registered 21 annual gains of more than 20% and the average market rise in the ensuing year was 10%. The chances of a rise after a big year, is 78% and that’s pretty good odds considering the improving global economy and the easy money around right now. By the way, the pullbacks in following years, after a boomer, range from 6% to 19.3%, and that’s why I say you should expect volatility in 2014.

• Given I expect stocks to rise over the year and that volatility is highly likely, then pullbacks or corrections – drops of 10% plus – will be buying opportunities.

• Locally, low interest rates, the falling Aussie dollar, a new government, rising confidence and even rising retail sales that have been helped by higher house prices, should help a stock market that has not passed its old high of around 6800. And even if we peel it back to 6300 for the excessive capital raisings post-GFC, we are still a long way from the old high watermark for the market. Historically, a market passes the old highest close before crashing into a bear market, and that’s worth remembering.

My worries

There is plenty of more good stuff I could throw at you to build my case, like a surge in new manufacturing orders in the USA and a big drop in the jobless rate in a place like Spain (Ole!), but what am I worried about?

Things like rising interest rates in the USA, profit slowdowns, debt-ceiling issues in Washington and war in the Middle East, but they are lower order concerns. The one big question mark is China, and I will be looking into that to test the warning from George Soros about the world’s second biggest economy. Soros can talk his own investment book and so his observations could be made to help his moneymaking strategy, which could be to short China.

My survey of experts I respect makes me comfortable that China won’t KO my bullish expectations for 2014 (see James Dunn’s analysis below) but I won’t be complacent on the subject. It will be a key research topic for the newsletter.

For those worried about Dr Marc Faber’s (Dr Doom!) forecast for a 20% plus correction this year, you have to remember he has been negative for years and has been wrong. He will be right one day, and a crashing correction could come this year, but I doubt it. Anyway, if it did happen, I would be a buyer of the stocks I want to hold for the long-term.

Finally, I have serious doubts about the Belski call of a 15-20 year secular bull market but isn’t it a really nice thought! However, I am happy to take one trading year at a time and the current one looks like a nice one to be in.

I look forward to helping you with your investments over the year.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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