Thoughts about 2014

In 2013, it was a great year to be invested in stocks. The S&P 500 surged more than 30%, closing at 1,848.36, representing the index’s best year since 1997. These robust gains were achieved in a year where earnings rose an estimated 4%-5% and revenues are on pace for about 2% growth. (The actual figures are not yet known, as companies will only start reporting their results for the December quarter later this week).

As is the case every year, market pundits have published their forecasts for 2014. As we discussed a few weeks ago, since 1950 in the year following such strong market returns, the market’s average return is about 11%. This result is better than the average yearly return of about 9% over that entire period.

On average, market forecasters expect the S&P 500 will reach 1,955 in 2014, representing a 6% gain. We’ve seen forecasts from Wall Street’s top strategists that range from a low of 1,855 to a high of 2,075. Wall Street estimates that earnings will grow by about 10% this year; revenues are expected to be roughly 4% higher.

There are several reasons to be optimistic about what may happen in 2014: (1) recent data provides signs of an improving economy; (2) corporate spending is expected to increase; (3) as 2008 moves further into the background, investor confidence could increase; (4) the Fed’s monetary policy, particularly towards interest rates remains favorable; and (5) more investors are expected to move funds from bonds to stocks.

One thing we’ve learned is that it is nearly impossible to forecast how the market will perform over a relatively short period. In short, we can say with a combination of confidence and cynicism that there is one thing we do know about where the market will end the year – anywhere but where the experts say it will finish.

We will continue to focus identifying attractively valued stocks that we are well positioned to benefit from longer term trends.