Trading has been mixed to start the year, with the market moving into a tight range as we head into earnings season.
It is the hope of accelerated growth that has driven this latest leg of the bull market, following the Federal Reserve’s announcement on December 18 that it would begin to taper its quantitative easing (QE) bond buying program. The market is up around 4% since its intraday lows of that day, and we will need to see some good earnings over the next few weeks if it is going to hold those gains.
Especially key will be results from financial and industrial companies, whose stocks have been performing well recently and where the market expects to see leadership in a post-QE, faster-growing economy.
Interest rates remain supportive of the market for now. Despite the Fed’s taper, the yield on the 10-year Treasury has stayed below 3%, which should keep any slide on disappointing earnings from getting too out of hand. Of course, as the Fed continues to taper, it will be lending less and less support to the bond market, so the potential for higher rates is a factor I will keep my eye on as the year goes on.
Careful stock selection will be critical again this year, and I believe continuing to invest in low-priced companies with reasonable valuations, solid earnings and individual catalysts is the best strategy.
As I’ve said before, the broader market is long overdue for a correction following its outstanding performance in 2013, and that means patience will be needed in 2014, as it is likely we’ll see bumps ahead. While some stocks move faster than others, I believe investors will be rewarded by using pullbacks as smart buying opportunities, and locking in profits as the trading environment plays out.