Traders work on the floor of the New York Stock ExchangeBRENDAN MCDERMID/Reuters
The 2014 strategy outlooks are rolling in at a furious pace now that December is here – and from the looks of it, strategists have been refining their one-line hooks. Forget about grand promises and complex money-making moves for the year ahead; what we get is a takeaway that's as hummable as an ABBA chorus.
Standard & Poor's chief equity strategist Sam Stovall has come up with this beauty: "Good years often follow great years."
In six words, then, a catchy forecast of ongoing stock market gains in 2014, based on history. As Mr. Stovall points out, there have been 20 cases since 1945 when the S&P 500 has risen more than 20 per cent in a given year. In the following year, the benchmark index has risen another 10 per cent, on average – or above the 8.7 per cent average gain for all years.
The problem with looking at history, though, is that the picture isn't alway perfect. The S&P 500 is now more than two years into an unusually smooth upward trend, with no correction of 10 per cent or more. The historical average has brought a correction every year or year-and-a-half (depending which type of average you use). So either way, the S&P 500 is fighting time.
Even though Mr. Stovall expects the S&P 500 to end 2014 higher, he also believes the index will suffer a pullback of at least 5-10 per cent on the way. And what's more likely is a full-blown correction of 10-20 per cent.
A deceleration of earnings and concerns about the Federal Reserve's intention to taper its monthly bond purchases hang over the market as risks. But Mr. Stovall thinks U.S. mid-term elections pose the biggest threat.
As he explains: " Since WWII, the S&P 500 has endured 12 bear markets, with seven of them occurring in a mid-term election year (1962, 1966, 1970, 1974, 1982, 1990, and 2002). Severe corrections concluded in two more: 1978 (-19.4 per cent) and 1998 (-19.3 per cent). However, these were not deep enough to be bear markets. What's more, there have been three mega-meltdowns, or declines in excess of 40 per cent, since 1945, and two of these three ended in a four-year cycle low year. Since we believe the U.S. equity market does follow a cyclical pattern, we think it will be susceptible to slipping into a correction of between 10 per cent-20 per cent in 2014."
If he's right, it raises a question: Do you hold on to your equity holdings in expectation of a "good" year in 2014, or wait for a correction and get another "great" year after the rebound?
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David Berman