The start of the new year brings all kinds of predictions for the stock market. Most of them tend to be bold – after all, no one gets noticed for predicting small changes. But all predictions aside, no one has any idea whether the stock market will rise, fall or just drift sideways. All we can do is speculate, so let’s have at it!
The Case For A Higher Market
Predicting a higher stock market is always popular. But the stock market is not a democracy where we can vote in higher prices by majority rule. There are tangible reasons that will cause the stock market rise. What might we expect in 2013?
Continued low interest rates. Low interest rates mean low borrowing costs for large companies, and that’s good for stocks. Interest rates continue to hold at record low levels, and according to the Federal Reserve, we should fully expect rates to remain low well into 2014. That being the case, the interest rate picture supports a higher market.
Rising profits. Corporate profits have been rising in recent years and that trend may well continue in 2013. In most businesses, employee payrolls are the highest expense. But companies have been finding ways either to cut staff or to grow without adding new workers. That’s a long term trend and there’s no reason to expect it to change.
The lack of investment alternatives. Low interest rates have virtually eliminated interest-bearing investments as serious competition for stocks. In addition, real estate continues to be a mixed bag. In the past few years the stock market has been the only investment game in town, and there’s not much reason to think that will change with a new year.
International instability causing capital flows into the US. Economic and political instability have become a fact of life in much of Europe and around the world. The US has traditionally been a capital haven for international investors looking for safety. As instability continues and even grows in other countries, capital will continue flowing to the US, and much of it will end up in the stock market.
The Case For A Lower Market
Everyone of the situations listed above rests on a delicate balance of circumstances that could change at any time and trigger a market decline.
Rising interest rates. Probably more than any other single factor, low interest rates have been driving the rising stock market. Should interest rates begin to rise that whole dynamic may come unglued, causing the market to fall. And since interest rates tend to rise much more quickly than they fall, the market decline could be prolonged.
Troubles in Europe. Up to a certain point trouble in Europe is a positive for US markets because it creates capital inflows. But if problems become too great, and result in one or more countries experiencing sovereign debt default, it could create a panic that hurts stock markets around the world, including the US markets.
A global slowdown. The economies Europe and also Japan are already stagnant, and China’s economy is slowing down. Since so many US companies now earn a substantial amount of their revenue internationally, this can hurt profits which will cause stock prices to fall.
US fiscal troubles. However the negotiations on the “fiscal cliff” turn out, there will be compromises. Since the Bush-era tax cuts were stock market friendly, we should fully expect that any compromise package will be something less. The stock market reaction to this will probably be gradual, since it will be many months before the final details are fully implemented and digested. But no matter what, the outcome will probably be toward the negative side, at least as far stocks are concerned.
The Market Will Be Range-Bound
The market won’t necessarily go higher or lower, it could just bounce around the middle and surprise everyone.
The status quo rules. For starters, the presidential election is over and there has been no change in the leadership. Based on market performance since 2009, it’s clear that the financial markets have a generally positive view of President Obama. As an incumbent, there is no reason to expect major policy changes. That will support a range bound market.
Slow economic growth. The economy may be growing but it’s doing so very slowly. It’s not running nearly fast enough to put upward pressure on interest rates, but it’s hardly flashing economic boom times either. That’s the perfect recipe for stagnation, and a stock market that’s heading nowhere dramatic.
No recession. Some are predicting a recession 2013. But if it doesn’t happen, the economy will continue to support the stock market as it has in recent years. Unemployment is gradually improving and some real estate markets are also gaining traction. That’s neither the optimal situation for a rising stock market, nor a harbinger of a significant decline.
A fiscal showdown compromise. The US is in a fiscal conundrum. If spending isn’t cut and taxes increased, deficits will continue at unsustainable levels. If spending cuts and tax increases are too severe, the economy will probably collapse. But if neither tax increases or spending cuts are severe, a middle course will be supported that will result in neither a rise nor fall in stock prices.
Readers: Where do you think stocks are headed in 2013? Higher? Lower? Sideways? Or someplace else? Do you see any looming factors that could make a difference either way?