The recent announcement by the Federal Reserve on December 18, 2013, favors the bullish scenario from our last communication. It is hard for me to consider that this current rally off the March 2009 low (DOW 6600 at the time) will last more than 5 years (March 2014); however, the liquidity provided by the Federal Reserve continues, and this should keep stocks in an upward bias, at least through the first half of 2014.
Last month, the Federal Reserve did announce a “taper” of its current program. I believe the most important component of its announcement, though, is the length of time that the current policy is to remain in place. This month, the Federal Reserve plans to pull back $10Billion a month from its current $85Billion, but the easing is expected to remain in place through the end of 2014. There will be additional announcements regarding the Quantitative Easing policy to come in the first quarter of 2014. It is and has been my view for the past 3 years that the market is experiencing a “federal reserve bubble”. Until the QE programs are stopped, the market can and will move higher. As the Federal Reserve currently has no plans to stop its easing policy until later in 2014, my current forecast is for the Dow Jones Industrial Average to reach 17,000-17,500 by April of 2014. When we get to April, I will update the forecast at that point. The bear market that I see on the horizon cannot be avoided; however, I expect that this bubble could now last through most of 2014. I see technical evidence that interest rates will continue to rise in 2014. Bonds and bond mutual funds will continue to have negative returns, thus investors will be forced to focus mainly on stocks.
Happy New Year from IAP.