5 Questions For 2014 Stock Market Bears

Gross domestic product — the broadest measure of economic activity — grew at a 4.1% annual pace in the third quarter, up from the 2.8% pace that was first reported in November. It was the fastest quarter for economic growth in two years, according to the Bureau of Economic Analysis. 

Monday brought some good news from the always important housing sector. From Reuters :

Contracts to purchase previously owned U.S. homes edged up in November, marking the first increase in six months and providing a hopeful sign the sector has begun to stabilize after its momentum was sapped by rising mortgage rates. “We may have reached a cyclical low because the positive fundamentals of job creation and household formation are likely to foster a fairly stable level of contract activity in 2014,” said NAR chief economist Lawrence Yun. 

Is Europe On The Verge Of A Collapse?
If we would have posed the question above in 2010 or 2011, the answer may have been “it may be”. A recent update from the European Central Bank tells us things are not as bad as they once were. From The Wall Street Journal :

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The euro zone’s financial system is on much firmer footing than it was following the intensification of the sovereign debt crisis over two years ago. In its report, the ECB said that “measures of systemic stress in the banking sector have declined markedly since the peaks that followed the intensification of the sovereign debt crisis in mid-2011.” Moreover, “a broad composite measure of systemic stress across major euro area financial asset classes has fallen even further, to lows not seen since global financial strains first emerged in the summer of 2007.” 

Are The Technicals Screaming Be Careful?
 
This week’s stock market outlook video answers the question above by examining the S&P 500’s weekly trend, and three key risk-on vs. risk-off ratios:

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Will The Fed Change Policy Too Rapidly?
The financial markets became obsessed with the term “taper” after Ben Bernanke implied the Fed may become less accommodative in May. The dreaded taper announcement finally came on December 18. Since then, the S&P 500 has gained 30 points. Part of the positive reaction from stocks was based on the Fed’s promise to keep rates low. From the December 18 policy statement : 

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. 

Is Political Gridlock in Washington Getting Worse?
Experienced investors are familiar with the fear caused by the fiscal cliff and numerous partisan budget battles in the last three years. In a recent interview on Financial Sense Newshour , Kim Wallace, senior advisor and Head of Washington Policy at Renaissance Macro Research, was asked about the significance of the recent budget deal made in Washington and what it means for the market:  

I think it’s a bigger deal for the markets than what we’re willing to give credit for…In terms of practical work here in Washington, it’s healthy I think for the process that you’ve returned to what we call “regular order”. That is, the budget committees got together and passed budget resolutions from both bodies for the first time I believe in seven, maybe nine, years. They were very two different documents. And although what they achieved in the budget conference was fiscally and economically insignificant (when you look at the numbers—clearly), it does allow more members…to be a part of the process.

Investment Implications - “Not As Bad” Is A First Step
Is the outlook for the economy, euro, interest rates, and political harmony 100% positive as we head into 2014? Absolutely not, but there is little question progress has been made. Before things can move into positive territory from a perception perspective, they often have to take a baby step into “not as bad as it once was” territory, which is exactly what we have seen with respect to the five questions.