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GregCorneille
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Gregory is the President and Senior Investment Advisor of Axcel Capital Management, LLC. He directs all research, analysis, and corporate strategy for the ACM Managed Account Programs. He is a former U.S. Army officer and a graduate of Hampton University. He began his career in investments in... More
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Axcel Capital Management, LLC
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Axcel Capital Management Market Commentary
  • January 2014 Market Commentary: 2014 Stock Market Outlook  0 comments
    Jan 3, 2014 3:39 PM

    With the major stock market indices recording their largest percentage gains in 15 years, what does 2014 have in store? More of the same? Are we in the beginning stages of a long bull market similar to the 1990s, is the stock market really overpriced? Are the markets ripe for a mid to major correction?

    For the month of December, the S&P 500 was up 2.36% and the Dow Jones Industrial Average (DJIA) up 3.1%. The S&P 500 & DJIA finished the year with gains of 29.6% and 26.5%, respectively. Interest rates on the 10-year treasury note finished the year at 3%, up a whopping 72% from one year ago.

    2013 marks the 5th year of major stock market index gains since 2008. From a macroeconomic perspective, this may offer some cause for caution. Historically, a typical bull market run inside of a secular bear market cycle will average about 3 ½ years in time. At five years in counting, the current bull market seems a bit long in the tooth - assuming we are still in such a market cycle.

    However, investor sentiment is overwhelmingly optimistic for 2014, with many major Wall Street banks predicting double-digit gains. Economic data figures representing housing starts, industrial production, and employment have all improved substantially over the past year.

    Although 2013 4th quarter earnings are not expected to match those of the 2013 3rd quarter, companies frequently reported record earnings and profits in 2013. And an average S&P 500 P/E (price to earnings) of just below 21 does not suggest stocks are overpriced by any stretch.

    However, we also enter the new year on the heels of the Federal Reserve's first step towards reducing its quantitative easing fiscal policy; which began in (in its current form) in 2011. Citing encouraging economic data and an improved outlook for the job market, the nation's central bank committed to reducing its purchases of treasury bonds to stimulate the economy from $85 billion to $75 billion.

    The Fed stated that it expects interest rates to remain stable. However, rates on the 10-year treasury note increased rapidly as speculation of the aforementioned policy change loomed; essentially doubling from yearly lows of 1.6% in May. Rising interest rates caused negative returns for most bond investors, and in the short term it seemed to have been good for stock market as more investor money poured into it from liquidated bond holdings. However, how would the economy and markets respond to a long term, larger interest rate increase - which some might suggest is unavoidable consequence of reductions in quantitative easing? Would a higher cost of borrowing money disrupt the real estate recovery and corporate spending? Interest rates have decreased quite consistently since the early 1980s; therefore a recent precedent to rising rates - especially on the tail of an economic recovery - is not available.

    All of the above simply underscores the need for a flexible investment strategy based on ongoing technical analysis. From a technical standpoint, the S&P 500 From a technical standpoint, the S&P continues to remain comfortably above all three major moving averages (50, 100, and 200) and the relative strength remains in positive territory. Emerging market stocks declined last month, placing their relative strength in negative territory. Therefore an allocation change from emerging markets to large cap domestic stocks was made, and we continue to hold our position in small cap stocks.

    Disclosure: I am long IVV, IVW, .

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