Rising Bond Yields
Rates moved up after Chairman Ben Bernanke said earlier this year that tapering could come at any time, and rising Treasury bond yields are another positive factor driving stocks higher. As the price to buy a bond falls, the yield rises because you’re getting the same interest rate payout but at a cheaper cost.
Rising yields mean falling bond prices, and that makes fixed income investors more nervous because the principal of their bonds erodes. This is especially problematic for bond mutual funds because investors cash out due to the principal erosion. As they flee bond mutual funds, they have to put that money somewhere, and historically it migrates to stocks. With the market still yielding more than banks and the Fed maintaining its 0% interest-rate policy, there is nowhere else to go.
So I expect 2013 success to carry into 2014, especially the first part of the year. January is typically a strong month because a new wave of pension funding floods the market, and this year, fourth-quarter earnings should be significantly better than the third quarter. It’s also nice that we shouldn’t have to worry about another possible government shutdown early in the New Year.
Looking further down the road, I do expect the market to get a little bumpier after April 15, because that’s when pension funding winds down. The good news is that this should be somewhat offset by good earnings. Still, at the end of nearly every quarterly earnings season there’s usually profit-taking. We may see it in mid-February for a few weeks, in mid-May for a few weeks, in August and again in November. It’s perfectly natural for some of our stocks to consolidate at the end of earnings season.
Bottom line: I expect the stock market to continue to “melt up” on persistent stock buybacks, strong inflows, a strengthening economy, more robust earnings growth and a still-accommodative Fed, 2014 has the potential to be as good as or even better than the strong 2013.