Economic Factors Will Drive Markets Higher Towards Year-End

A steep pullback seems unlikely through year-end

   

A mix of an accommodative Federal Reserve, low interest rates, and what seemed to be a continuing delay of a quantitative easing (QE) taper throughout the year have helped the broader market run up nearly 30% in 2013. With a month left to go, it could be an interesting end to what’s been an outstanding year on Wall Street.

After eight weeks of gains, we could be due for a near-term rest. The market has been quiet to start December, as investors are watching for details about holiday and general retail sales through year end. The consumer, after all, drives 70% of the U.S. economy, and if the numbers and commentary from the last few days are any indication, the consumer is a bit tired. If holiday retail news remains lackluster, we should expect to see continued pressure on stocks.

Investors are also keeping a close watch on economic news, particularly Friday’s November employment report and the Federal Reserve’s upcoming meeting on December 17. The Fed Beige Book release showed that the U.S. economy held steady during the 16-day government shutdown, growing moderately in most regions from October through late November. The results will be taken into consideration during the December meeting, when many economists believe no changes will be made to the current QE policy. However, there is a chance the central bank could start to make reductions, especially if Friday’s jobs report is strong.

While I do think a steeper pullback is likely, the timing remains uncertain. Even when you set everything else aside, we have not had a 10%+ correction in 27 months. That’s rare. Historically, we see at least one a year, even in healthy bull markets with a lot of fuel.

At the moment, there is plenty of froth that in the absence of major bad news could combine with seasonal patterns to keep stocks moving higher through the end of the year and early into 2014. At that point, we’ll be facing the ever-present question of whether Washington can come together on the budget mess.

Whatever happens, I continue to like companies  with growth catalysts independent of the broader economy, like  F5 Networks (FFIV).


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