Now that New Year's has come and gone, as we look forward into 2014, the big question will be how the stock market performs this year, especially following an impressive advance in 2013 that was beyond my estimates.
The past year was seen as the year of the Fed-induced market rally that resulted in some strong gains across the board from blue chips to technology and growth stocks. It was one of the best years to make money on the stock market in recent history.
At this stage, the economy is looking better and will need to strengthen in order for the stock market to advance higher toward more record gains. A strong January would be positive and would suggest an up year for the stock market.
My early view is that the stock market will head higher in 2014, but not at the same rate as we saw in 2013, which was out of whack.
The key will be how fast the Federal Reserve, under Janet Yellen, decides to taper its bond buying. A slower taper is supportive for the stock market. However, the flow of money will depend on the rate of economic renewal and, more specifically, the jobs market and whether job creation continues to move along at a steady pace. If we see growth and more jobs created, the Fed will continue to cut its bond buying, though it has said that it will keep interest rates near record lows until the unemployment rate falls to 6.5% or lower, which could happen sometime in mid- to late 2014.
I see another up year for the stock market in 2014, but I doubt we will see gains in excess of 30% this year. By my estimates, the S&P 500 could target a rise of 15% to 2,100 or perhaps as high as 2,200 for a 20% rise. The Dow Jones Industrial Average could move upward toward 19,000, for an advance of 15%. Of course, the actual advance will depend on the economy and what the Fed does.
Technology and small-cap stocks will likely lead the markets higher again this year. I like the Internet and mobility areas in the technology sector. Social media will likely take a breather following the staggering gains we witnessed in 2013.
So while the stock market is looking higher this year, I also feel that stocks could be vulnerable to selling and a stock market correction following the record advances in 2013. With the stock market in its fifth year of the current bull market, there's some vulnerability on the charts.
But while the stock market may seem risky, investors should know that there's more money to be made in equities than other investments, such as commodities. Take gold, for example. I remain bearish toward the yellow metal unless we see a rise in inflation or market risk, which would cause investors to flee to this safe haven. For the time being, I would look to trade gold on weakness and sell into strength.
Whatever the gains are in 2014, the key will be to buy more selectively this year and be alert to any stock market weakness to buy on dips.
This article The Contrarian: Why I Think Stocks Will Rise in 2014 was originally published at Daily Gains Letter.