If you are wondering whether the stock market will go up in 2014, yesterday (12/18/2013) was an indication that it might. At the Dow’s lofty 16,000 level, many investors are weary that stocks might be at the end of what has been a spectacular and very profitable run. But that run could continue higher based on the Fed’s announced intentions.
What The Fed Said Is Important For 2014
Investors liked what the Federal Reserve said and stocks went up by more than 290 points at the end of the day. This happened despite the Fed announcing they would start to cut back on their stimulus by 10 billion a month (a seemingly negative thing for stocks).
Investors liked this because they had feared the amount would be 20 billion a month or even more. Finally getting word about something they all knew was going to eventually happen and then finding out the amount of the taper would be less than it could have been was viewed as a relief in investors eyes. Thus the market went up as buying stocks was seen as less of a risk than just moments before the announcement.
You must understand that investors don’t like uncertainty. It makes them nervous and less willing to buy stocks. Clarity (understanding what lies ahead), on the other hand, makes them more confident and more willing to put their money into the stock market.
Interest Rates Will Be Kept Low
The other big thing the Federal Reserve said yesterday was that they would keep interest rates at their current low level until at least the unemployment rate goes below 6.5% (it is 7% now). That means low interest rates are here to stay for quite some time as it is unlikely the economy will be getting that much better any time soon.
Why are interest rates so important to the direction of the stock market?
Low interest rates are a good thing for stocks because they eliminate one of the popular ways of investing: buying Treasury Bills and bank certificates. They are both easy to buy and risk free because they are FDIC insured but if they pay next to nothing as they have for many years, you can’t make any money buying them. Conversely, once interest rates start to go up, more people will choose to pull money out of stocks because they can get more interest without risk.
Low interest rates leave the stock market as one of the only games in town and they are a big reason why it has gone up for 5 straight years. Confirmation from the Federal Reserve that low rates will continue is a VERY good thing for the stock market. Low rates mean that anyone who wants a decent return on their money pretty much has to be in stocks.
Will The Stock Market Go Up In 2014?
There is absolutely no way to know what direction the market will take next year as interest rates and the taper aren’t the only things that will determine its course. For instance, no one knows how ObamaCare will affect the stock market and then there is that pesky little thing called the national debt that keeps going up. There are also a host of many other economic issues that may crop up throughout the year.
However, at this point in time, the fact that the Fed will not be doing anything drastic for at least the beginning of 2014 bodes well for stocks. It makes me feel a bit more comfortable buying stocks and I think it will do the same for other investors.