2014: Could Be A Year Of Economic Growth

With a few days left to trade in 2013 where we have seen the markets shoot up towards the end of the year, even as the Federal Reserve announced the end of quantitative easing (QE), leaves us to believe 2014 should be a good year. This is a year that has seen the S&P 500 jump up 28 percent and this should simply spill over.

Let us look at historical fact. Going back 60 years, a year that follows the year the S&P 500 rose 20 percent or more, Gross Domestic Product (GDP) growth was always expansionary or positive. The worst year on record following this pattern was a GDP growth of around two percent. This is the expected growth for 2014. Based on history, we should be okay and should not do worse.

The cards could be in favor of a surprise to the upside. With the recent string of stronger than expected economic growth, the U.S. economy could be on solid footing as the world’s largest economy repairs itself. With QE out of the way, we could see real growth now. Let us look at GDP growth in years that followed a good year for the S&P 500 to explain this reasoning. The maximum growth was at 5.4 percent. The average and the medium growth was at 3.8 percent. This means the mode, or what occurs most often, was nearer 4.5 percent and indicates a stronger possibility real GDP growth could surprise us in 2014.

There are some risks here and solid reasons why this might not happen.

More often than not the stock market is not an indicator to where the economy actually is. Direction of the equity markets and individual stocks is often determined by what is called the “psychology of crowds” as well as how individuals are either overinvested or underinvested at the time they are buying or selling. So when we think we are looking at a market driven by the economy, this might not be the case.

Another argument against the S&P theory is that the Fed’s dovish policies to date, their massive QE program in particular, has led to a massive bubble in the equity markets as the Fed has poured so much money into the economy to support it. This, alone, makes the directions of the markets a poor indicator of the direction of the economy.

We should have some growth next year. There is no doubt and no way we can argue that the Fed’s dovish policies have not propped up asset prices but that effect is more than likely to continue for some time. That certainly helped the S&P surge, but there was some solid profit growth as well. Just looking at recent numbers shows that 2014 should be a year of growth. We are seeing signs of real economic strength as the GDP grew at 4.1 percent (annualized) in Q3. We also saw unemployment falling to 7 percent. These are two good indicative signs that 2014 could be a year of economic growth which could give the equity markets a nice boost.