It’s all in the numbers.
Last year was a good one for financial markets, a time of recovery in equity markets, of stronger economies and firmer confidence.
The S&P 500 had its fifth straight up year and posted a 20 per cent plus gain after two years of single digit gains.
It’s been so good, with a recovering US economy and a better outlook for Europe, that 2014 should continue at the same pace.
However, Colin Cieszynski, Senior Market Analyst at CMC Markets, says it’s possible the index may have moved up too fast two quickly, leaving it vulnerable to a correction in 2014.
And the history of the numbers may be on his side on this.
Cieszynski says analysis of previous cycles suggests stock markets may have difficulty repeating their strong performance in 2014.
Over the last few decades, years ending in 3 have been particularly strong with four of the last five posting double digit percentage gains. 2013 was no exception.
Years ending in 4, however, have had a much rougher ride with the last three showing only small increases, or decreases, over the course of the year.
Years ending in 4 have been only one of two (those ending in 8 being the other) to average a loss since 1970.
While 1974 and 1984 had outright losses, the marginally profitable 1994 and 2004 were consolidation years which finished with gains that were much smaller than the previous year.
Cieszynski, in his 2014 Market Outlook Report, says:
Since 2000, US stocks have been in an inflationary bear market similar to the one that prevailed between 1966 and 1982, where markets remain flat for a long period but traders lose on an inflation-adjusted basis. Last year’s performance was quite strong and moved the Dow well ahead of the performance of the previous cycle. The question heading into 2014 is whether indices are due to fall back to trend, or if the end of this inflationary bear has arrived early and a new bull market is getting underway.
For the first time in many years, the influence of politics on the global economy and markets turned a corner in 2013 and appears set to decrease in 2014.
However, Cieszynski has taken a look at the Presidential cycle in the USA, focusing on the parties’ second term in office.
Year 5, coming off a re-election, has historically been very strong, particularly for the Democrats who racked up big years in 1997 and 2013.
However, Year six appears to have been difficult for Democrats in the last 50 years.
This suggests, says Cieszynski, that US indices could struggle in 2014.