While we probably won’t see any surprises bigger than the one we saw in 2013, with the S&P 500 being up close to 30%, there are sure to be unforeseen events in 2014. I’m not sure anyone saw 30% coming with the headwinds we faced at the beginning of the year when we went through a tax hike, a sequestration that dragged on GDP, arguing about the fiscal cliff and risking default on our debt service, possible war in the Middle East and finally a government shutdown. One would think after reading all that, the stock market wouldn’t have been so kind all year long. However, we never even saw a full-blown correction of 10% or more, but that will happen at some point. So, while 2013 was pretty much a smooth ride there are bound to be some surprises in the new year that aren’t priced into share prices already.
Tapering Happens Too Quickly
When the Fed decided to slightly trim back its QE3 program by $10 billion a month, I called that the market was ready and wouldn’t sell-off and I said the $10 billion figure was more symbolic than anything else. I still believe the Fed wanted to taper slightly to see how markets reacted. The reaction was one of jubilation as all major indexes were up more than 1% that day which is bullish as it meant market participants took the news to mean the Fed thought the economy was strong enough to handle it. But unemployment also fell more than expected to 7% and GDP growth was raised to 4.2%. Might this give the Fed the ammunition it needs to really begin tapering in a meaningful way? I believe it could. I also believe a large taper isn’t priced into the market and any surprise from the Fed could cause the market to correct steeply. Read more »