Will Strong Stocks Last Until 2014?

What's in store for currently strong stocks?

2013 will go down as the year financial markets made a roaring comeback; five years after the economic crisis wreaked havoc on investments around the world, indexes are seeing a tremendous surge.

From this time last year, the S&P 500, for example, is up a hefty 26 per cent and the NASDAQ has shot up by 35 per cent. Here at home, the gains are not as impressive – but still significant. The TSX is up more than 10 per cent year to date. With interest rates still at record lows and government’s messages on the economy mixed, some may be surprised to hear the markets are doing so well. Here is why the gains have been outstanding lately.

Canada Employment Numbers On The Slow Uptick

In Canada, employment growth has been slow and steady. In November, Canada created jobs for the fourth month in a row. Last month 22,000 jobs were added to the work force and unemployment rates stayed put at 6.9 per cent. There was even greater job creation in the U.S., pushing the jobless rate there to a five-year low at seven per cent. This is sending a positive note to investors to buy and hold stocks in this increasingly stronger environment. The U.S. Labour Department reported that, a more than expected, 203,000 jobs were added in November.

Fears of Quantitative Easing Ending

Investors have waited with baited breath for the U.S. Federal Reserve to withdraw its quantitative easing measures, the method of buying back government bonds, which creates $85 billion per month for the U.S. economy. While the stance has been that QE would only be retracted once certain benchmarks, like employment, have been hit, the positive growth in jobs is actually having the opposite effect.

With job growth seemingly so strong, the Fed may worry that removing quantitative easing could cause job growth to start contracting as businesses could go into wait and see mode.

But that has not been in the case in Canada.  In 2012, the Canadian government started backing off the stimulus phase of its Economic Action Plan; since then, jobs have continued to be created, by in large in the private sector.  According the Plan’s website, “Over 30,000 projects were completed under the stimulus phase of the Economic Action Plan. These projects have contributed to a strong labor market recovery, with over 610,000 net new jobs created since July 2009.”

Huge Amounts Of Liquidity Returns

Since 2008 investors have dumped stocks and retreated to safe havens like the U.S. Dollar and gold. But now that markets have shown some momentum, that cash is re-entering the market. Investors are buying stocks with high yields and many are opting for the buy and hold strategy. This is the opposite attitude from pre-2008, when investors were borrowing to invest and only looking at short term massive gains as a reason to buy. Although markets have been up sharply its mostly because of those that have been standing on the sidelines who are now getting back into equities.

What’s In Store For 2014?

Experts predict Canada’s economy will be stronger during the second half of the year, and that job creation will continue at the same rate. Recently, the CIBC announced it expects Canada’s economic growth to trail the U.S. In its outlook for 2014 it says, “the Canadian economy will grow by 2.3 per cent in 2014, compared with a forecast of three per cent for the United States.” This is already happening on the markets with the “Bull Run” three times stronger on Wall Street than on Bay Street.

But, Canadians still have much to feel good about in 2014. Economic conditions, such as employment prospects, are better than they’ve been for years and the real estate market, despite continues threats of a correction, is expected to  march forward in 2014.  The strength in the market has been dramatic, which can often scare investors. But in this case savvy investor should not shy away from this bull run as the indicators are its here to stay for 2014.

 

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