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2014 Will Be a Stock Picker’s Market

Those who focus on strong or improving fundamentals will be rewarded most richly of all


In 2013, the market certainly “melted up.”

If you’re not familiar with the term, it is the opposite of a meltdown, in which all stocks are caught up in a selloff. 2013 saw the majority of stocks rise regardless of their individual merits.

There are plenty of reasons for this, including the continuous Federal Reserve pumping. The (just reduced) $85 billion that the Fed pumped into the markets each month allowed companies to borrow on the bond market and aggressively buy their stock back. In the past two years, almost a trillion dollars’ worth of stock has been bought back. In the blue-chip arena, billion-dollar stock buyback programs have been very common.

That’s the good news.

The bad news is earnings growth for the S&P 500 was really muted (if nonexistent) for five straight quarters. It wasn’t until the third quarter of 2013 that earnings really got into gear. Now that the S&P 500 has posted meaningful earnings growth for the third quarter (and is expected to see profits improve through the end of 2014), I expect the market to refocus on earnings announcements.

With this focus on earnings and the Fed announcing it will taper — but not stop — quantitative easing, we’re going to see much of the same activity in 2014 as we did in 2013. We’re going to get year-end pension funding in the new year. And I think that the market is pretty much going to meander higher through the end of April — we’ll probably have somewhat of a correction in mid-February at the end of earnings season.

But the fact is there’s nowhere to go. The market still yields more than the bank, and the Fed still maintains its zero interest rate policy, which allows corporations to borrow very cheaply on the bond market.

Now after April 15, I expect the market to get a little bumpier, simply because that’s when pension funding winds down. But this should be somewhat offset by good earnings. At the end of nearly every quarterly earnings season, there’s usually profit taking. We usually see it in mid-February for a few weeks, in mid-May for another few weeks, in August for several weeks and in November for maybe a week or so. So it’s perfectly natural for several of our stocks to consolidate at the end of earnings season.

When making stock market predictions, the longer ahead you look, the fuzzier it gets. However, from what I’m seeing, 2014 looks like it’s going to be another strong year for the markets in general.

The truth is, the American economy — and subsequently the stock market — improved immensely in 2013.

GDP for Q3 was revised up from 2.8% to 3.6%.

The Investors Intelligence Survey conducted after Thanksgiving showed about 85% of investors were bullish — the highest reading since 1987.

Oh yeah, and the Dow Jones Industrial Average finished up 28%, its best year since 2003.

The worst is clearly behind us, and this uptrend creates a huge opportunity for growth in the new year for Wall Street’s biggest names.

So investors’ best bet in 2014 is to hold quality blue chip stocks that are seeing big earnings growth and topping even the very ambitious expectations of Wall Street.

As far as my forward projections are concerned, I do expect the Dow Jones to hit 20,000 and the S&P 500 to be up about 16% this year. That will continue the P/E expansion trend we’ve been seeing lately.

The one thing I want all investors to know when making investment decisions in 2014, however, is that the market is becoming more focused on company fundamentals as it loses breadth and power. Next year will not be the year to pick a sector and ride it.

No, 2014 will be a stock picker’s environment — and those who avoid speculative plays and cherry-pick companies with strong or improving fundamentals will do quite well in the new year.

Louis Navellier is editor of Blue Chip Growth.

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