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5 reasons why stocks will go up in 2014

December 19, 2013: 12:50 PM ET
What's the market outlook for 2014? Experts expect the rally to continue. But the gains may be more modest.

What's the market outlook for 2014? Experts expect the rally to continue. But the gains may be more modest.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Understatement alert!

For investors, 2013 was a very good year. (Sing it, Chairman of the Board! And of course, I mean Frank Sinatra and not Ben Bernanke. Or Jamie Dimon for that matter.)

Stocks have surged this year. And even though there were some minor blips along the way, the Dow and S&P 500 are on track to close out 2013 at record highs.

So naturally, the big question facing investors now is this: Can the market do it again in 2014? The huge gains of 2013 won't matter much if they are replaced by losses next year.

After all, this increasingly myopic market's theme song should be "What Have You Done For Me Lately?" by Janet Jackson.

Fortunately, many investment experts think that stocks will head higher next year. And while I always worry a little bit when few others are worrying about what could go wrong, I'm inclined to drink the Kool-Aid believe the bull case.

The people I've spoken with are not predicting gains in (wretched?) excess of the 25% that the S&P 500 has enjoyed this year. Returns should be more like the Federal Reserve's two favorite words: modest and moderate.

And there will probably be more volatility along the way. Stocks are overdue for a real correction, a pullback of more than 10% that could shake out some of the more speculative froth in the market.

But with all that said, here are five reasons why stocks should continue to rally in 2014.

Wall Street still ♥s the Fed. And vice versa. Wednesday's big stock market pop after the Fed finally announced it was ready to start cutting back, or tapering, its bond buying program is an encouraging sign.

For one, it shows that investors are finally ready to accept the fact that the economy is strong enough to move along without the Fed's training wheels.

Related: Why stocks soared on the taper

The mere fact that investors can stop wondering when the taper will happen is a huge positive. The endless Hamlet-esque 'to taper or not to taper' speculation was getting ridiculous.

"Every two minutes I seemed to get an email about views on Fed tapering. There is this obsession with the short-term. The big point is that the Fed has to taper because the economy is improving," said Marty Sass, chairman and CEO of investment management firm MD Sass.

And the Fed's decision to just trim its bond purchases from $85 billion a month to $75 billion sends a signal that the central bank realizes it can avoid creating  another market taper tantrum with a gradual unwinding of quantitative easing. Win/win.

What's more, there is a seamless transition set to take place at the Fed. Current Fed vice chair Janet Yellen is set to succeed Ben Bernanke when his term expires at the end of next month. Which brings me to my next point.

2014 will not be 1994 all over again for bonds. Now that the Fed has finally gotten the tapering out of the way, investors can get back to focusing on where long-term interest rates should go in a somewhat more normal market environment.

The good news is that few are predicting a massive spike in bond yields like what happened in 1994, when the Fed started to jack up interest rates in response to a strengthening economy.

Yields on the 10-year Treasury note have already surged from a low of 1.6% in May to nearly 3% this year. They won't go much higher as long as the Fed sticks with a slow and steady taper, and as long as the economy does not start to overheat and show signs of inflation.

That's unlikely since a huge component of inflation is rising wages. And even though the job market has improved, it's not roaring. Yellen is viewed by most Fed watchers as being a dove -- someone more worried about high unemployment than inflation. She's not going to change into a bird of a different feather.

"I don't think Janet Yellen will be more hawkish and feel that the Fed is behind the curve on inflation. That would lead to a disorderly move in the bond market," said Jim Swanson, chief investment strategist at MFS Investment Management.

The Great Rotation is finally upon us. With this in mind, all the sources I spoke with for this column felt that the 10-year yield would probably not go much higher than a range of 3.25% to 3.75% in 2014.

That's not enough to cripple economic growth. But it may be a big enough jump to convince investors that stocks are a  better bet than bonds once and for all.

In other words, the Great Rotation from bonds will really happen in earnest next year. Investors have begun to take money out of bond funds in the last few months of 2013 after years of binging on fixed income. That trend is likely to continue. And that money will probably find its way to the stock market.

"Stocks could go up another 10% to 15% in 2014. Investors may finally begin to really abandon bonds," said Jeffrey Kleintop, chief market strategist with LPL Financial.

The market is not bubbly. A common mistake that investors (and the financial media) make is to declare that something must go down a lot because it has gone up a lot. But stocks at the end of 2013 do not remotely look as irrationally exuberant as they did at the end of 1999.

The S&P 500 is trading at 15 times earnings estimates for 2014, a reasonable valuation considering that analysts are predicting earnings growth of more than 10% next year, according to FactSet Research.

Related: Sticking with momentum stocks isn't a sin

"At the end of the day, stocks are going to follow earnings. Earnings are going to be pretty good. Investors shouldn't make it more complicated than that," said Scott Wallace, founder and CIO of Shorepath Capital Management.

David Lafferty, investment strategist with Natixis Global Asset Management, adds that when you toss in an expected dividend yield of about 2.1% for the S&P 500, a low-double digit return for stocks is completely plausible.

It's the economy, stupid. The U.S. economy does not appear to be at the risk of another recession anytime soon. And the glass appears to be half-full for the rest of the world too.

Many experts feel that gross domestic product in the U.S. could grow at an above 3% clip in 2014. That's still not gangbusters growth. But it's an improvement over the past few years. In fact, Sass thinks that both the U.S. economy and market are in the middle of at least an eight-year long recovery that began in 2009.

Looking abroad, Swanson notes that "China is inching up and Europe is doing better." That should boost the shares of large U.S. multinational companies, the types of firms that have the biggest weighting on the Dow and S&P 500.

Related: China's economy powers ahead in third quarter

And Eric Chaney, chief economist for AXA Group in Paris, said that a global economic rebound is good news for markets around the world. He thinks there is "zero chance of a hard landing in China" and that bank restructuring in Europe will help that continent continue to emerge from its economic funk.

So there you have it. Hopefully the bulls I spoke with are right. And isn't it nice to end the year on a cheery note? Enjoy the holidays everyone! The Buzz will be back on January 2, 2014.

But wait! There's still time for one final ...

Reader Comment of the Week! I wrote about Tesla (TSLA) on Tuesday. The stock has been undeniably one of the top investing stories of 2013. The column included a holiday-themed image of Tesla's electric car. But one Twitter follower said it was not an accurate portrayal of the Model S.

Don't make me ask Elon Musk for another blog post about how running over large metal objects is not good for your car!

And that's that.

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