U.S. Stocks Will Continue with Double-Digit Gains
The Prediction: The S&P 500 will finish 2014 at 2,033 - about 10% higher than its closing value on Jan. 15.
The Evidence: The S&P 500 is coming off its best year since the bull market of the 1990s, as the domestic index vaulted nearly 30% in 2013. Given how big that gain was, can stocks really continue to rise in 2014? I mean, how much gas is left in this market's tank?
The answer is plenty. Here's why:
While the Federal Reserve has embarked on a "taper" of its quantitative easing program, I suspect that a Janet Yellen-led Federal Reserve will taper gradually. More importantly, the Fed's zero interest rate policy will remain in place for the entirety of 2014 - and likely well into 2015. The historically low cost of capital will provide sufficient liquidity for this market to keep moving higher, particularly over the next 12 months.
Then there are earnings. I expect they'll be strong in 2014.
We've already seen upbeat bank earnings, and they'll set the tone for all of 2014. You see, as this earning season unfolds, I expect we'll see many more unexpected earnings victories.
Yes, there will likely be some sluggishness on the top line for many companies; however, profit margins for many companies continue to improve as a result of greater efficiency and improved technology. That's a bullish combination, and a tailwind for earnings. That will keep pushing stocks into new high territory.
A Choppy Ride for Treasury Yield
The Prediction: By this time next year, the yield on the 10-Year Note will be 3.08%, a level that acknowledges the reality of economic growth in the U.S., but that also reflects the fact that growth will come at a slow and sluggish pace.
The Evidence: Bond prices slumped significantly in 2013, as the yield on the 10-Year Treasury note spiked to above 3% by the end of the year. The action in the bond pits last year reminded us that interest rates can, and do, move higher. That's something many recent bond market participants had forgotten, and I think it was a good lesson to be reminded of going forward.
As for yields in 2014, I expect there to be a continuation of the recent "choppy" market trading.
So far in 2014, the 10-Year yield has fallen back down to 2.84%, a move that I expected to see after the big run higher at the end of last year. I do, however, think this recent pullback is merely temporary, and I expect yields to rise back above that 3% mark. The path to that 3%-plus benchmark interest rate will, in my view, be choppy, as traders wage a battle for the direction of the cost of money.
The Dollar Will Stay Strong vs. the Euro and Yen
The Prediction: By the end of the year, I predict the dollar-yen exchange rate to rise to 110. The dollar-euro will undergo some normal fluctuations, but by this time next year I suspect it will be unchanged at 1.35.
The Evidence: The value of the greenback versus rival foreign currencies is on the minds of many these days, and for good reason. With the Fed tightening up the reins on its bond-buying program, we should expect that to be dollar-bullish.
I think the Fed's action is just part of the equation in the dollar-bullish thesis for 2014.
On the other side, the euro continues to be weak relative to other global currencies, while the Japanese yen has come under its own bearish pressure.
In the case of Japan, that nation continues the aggressive reflation efforts first instituted by Prime Minister Shinzō Abe. And, as we've seen, those policies are yen-bearish and dollar- bullish.
In Europe the pressure on the euro comes from a lack of any real widespread GDP growth, and that's a condition likely to persist throughout the year.
How about the Chinese yuan? The exchange rate of dollar and yuan is a bit more complicated because it is more political than market driven.
In terms of purchasing parity, the yuan remains overvalued at anything below 7.0, but the trend continues to be bullish for the yuan. I expect to see the dollar-yuan break 6.0 intra-year in 2014, then reverse trend and end the year at 6.1. In other words, right about where it started.
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