This certainly may go down as one of the least liked rallies of all time, but it's been one doozy of a ride if you're a long-term investor.
All told, since the March 2009 lows, the iconic Dow Jones Industrial Average (^DJI -0.10%), broader-based S&P 500 (^GSPC 0.21%), and technology-heavy Nasdaq Composite (^IXIC 0.61%) are up 145%, 167%, and 220%, respectively. What's more is these returns are looking quite sustainable with tangible catalysts behind the move.
Last week the U.S. Bureau of Labor Statistics released the November jobs report, which showed gains of 203,000 nonfarm jobs -- a considerably higher number than was expected -- while the unemployment rate ticked down to a new five-year low of just 7%.
Source: Marcy Hargan, Flickr.
The U.S. economy is also growing faster than anyone had expected, with the second estimate of U.S. GDP moving up to 3.6% from the initial estimate of 2.8%. As I've mentioned previously, this strong growth would indicate that the Federal Reserve's monetary easing policies, which are targeted at keeping lending rates at or near historic lows, appear to be working by encouraging business expansion and consumer purchases. With our GDP growth largely based on the consumer and consumer credit also increasing by $18.2 billion in October, I would say this recent string of data definitely fuels the fire for optimists.
With roughly three weeks left in the year, 2013 will, barring a dramatic change, go down as one of the most lucrative on record for investors.
But can this rally continue into 2014? I wouldn't be too sure about that.
The way I see it, there are three factors that could rear their head in 2014 and unseat these three widely tracked indexes from their highs. Obviously, no market goes up forever without some form of correction, but the catalyst for a sizable drop in stocks simply hasn't been there. Here are three catalysts that I feel have the potential to send the markets and U.S. economy running for the hills in 2014.
No. 1: The end of QE3.
I consider the end of the Federal Reserve's monetary easing program to be the most visible and most logical reason for U.S. growth to slow, yet it's also the one that worries me the least because it's been the most visible since May.
Source: Medill DC, Flickr.
The Federal Reserve has been purchasing a cumulative $85 billion in mortgage-backed securities and long-term U.S. Treasuries each month since late last year. The primary purpose of these monthly purchases is to keep long-term lending rates low, which should help encourage businesses to take out loans to expand and hire workers, and give consumers incentive to buy homes with mortgage rates near record lows. Once this monthly bond-buying begins to taper, the fear among economists is that the artificial push lower on long-term U.S. Treasuries will abate. Remember, bond prices and yields have an inverse relationship, so if the Fed is buying bonds and possibly pushing bond prices higher, the yield is likely being pushed lower.
In other words, once the QE3 taper is under way, long-term lending rates may head higher, which would portend bad news for the housing sector and would likely do more harm than good to the banking sector.
Banks such as Wells Fargo (WFC -0.85%) might be one of the few that fares well in such an environment because it's steady deposit growth during this recovery will benefit from higher yields, although the majority of the banking sector could struggle as loans simply dry up. Wells Fargo, for example, has announced two separate rounds of layoffs in its mortgage service division as loan activity dries up.
As a logical consumer, I see 30-year mortgage rates at 4.25% and get excited because that's still well below the average over the past three decades. However, most consumers have been brutally spoiled over the past couple of years with record-low lending rates and simply sat on their hands when mortgage rates moved higher by as much as 100 basis points between May and the summer -- which in the grand scheme of things is but a blip! According to the weekly data from the Mortgage Brokers Association, mortgage loan originations and refinancing is still down 60% from those May highs and have yet to recover even as mortgage rates now level off at four-month lows.
As you can see, QE3's end could very easily sack the housing sector if no one will take out a loan, hurting banks' loan growth.
No. 2: The start of Obamacare.
No political swipes here whatsoever, but the health-care reform law known affably as Obamacare (a.k.a. Patient Protection and Affordable Care Act) has the potential to grind this stock market rally and U.S. growth to a halt.
Having covered Obamacare's ins and outs for more than a year now, there are two particular aspects about the health-care reform law that have me concerned.
First, the prospect for higher out-of-pocket premium costs for young adults could really sap retailers' earnings. The individual mandate, which is the actionable portion of the PPACA that requires individuals to purchase health insurance of face a penalty in 2014 that's the greater of $95 or 1% of their household income, is set to go into effect on Jan. 1. This means young adults, which are the pivotal component to ensuring Obamacare's success, either need to spend what could be more than $200 per month (unsubsidized) on average on health insurance or pay an end-of-the-year tax penalty when they file their 2014 taxes, assuming they aren't exempt.
Before Obamacare, young adults were able in many cases to get catastrophe plans that covered minimal benefits but protected many against extremely costly hospital stays. With Obamacare's minimum benefits guidelines now beefed up, many of these catastrophe plans will be going away, or they'll simply double in price as the number of benefits offered goes up as well. These added costs for young adults likely means cutting their discretionary income elsewhere, such as with retailers.
The other concern I have with Obamacare is that large businesses will do everything in their power to avoid having to supply health insurance coverage for their full-time employees as mandated by the PPACA. With the employer mandate pushed back a full year to a Jan. 1, 2015, implementation, we're likely to see a new round of hourly cutbacks and part-time hiring in 2014 so as to avoid any penalties that will be enforced by the employer mandate in 2015.
Last year, before the announcement of the one-year delay, theater operator Regal Entertainment (NYSE: RGC) cut hours for thousands of employees below the PPACA-defined 30-hour full-time threshold in order to avoid any chance of penalty liability. The move will certainly save Regal money on an annual basis, but it will hurt employees in their pocketbook well beyond their ability to get health insurance coverage.
Source: St. Louis Federal Reserve.
It's not uncommon to see part-time hiring rise during a recession, but economic recovery periods often lead to robust full-time hiring growth. For much of the year we've witnessed part-time hiring taking precedence. Obamacare's employer mandate has the potential to really push high-turnover businesses like restaurants and retailers away from full-time hiring and could make it difficult for consumers on part-time salaries to spend their money and fuel U.S. economic growth.
No. 3: Falling Congressional and presidential approval.
At no time in U.S. history can I recall a point where Congress and the current president were disliked by such a large group of the American public.
Source: White House on Flickr.
As of the latest reading by research firm Gallup, which has devoted itself to weekly measures of President Obama's approval rating with the public, the president clocked in with a year-low approval of just 40% as of Nov. 24, with a disapproval rating in excess of 50%. But if you think that's bad, you should see Congress' approval rating, which, when considering the margin for error, is actually approaching a point where zero is a tangible possibility. That figure, according to Gallup in November, hit just 9%! Keep in mind that Americans have every reason to be displeased with their legislative representatives following a 16-day government shutdown in October and numerous debt-ceiling talks that have been swept under the rug at the last hour ... but 9%? And that's down from an approval rating of 39% as recently as the height of the U.S. recession.
I've certainly taken my fair share of jabs at this Congress' inability to work together and get laws passed, but the negative sentiment toward government has grown so universal that it actually threatens to hurt economic growth and consumer spending. In other words, how can you expect consumer sentiment to improve and for Americans to open their wallets if they don't believe their country is headed in the right economic direction?
If Congress can't come together before February and hash out a long-term debt-ceiling plan, then it's quite possible that Americans' strong disapproval will negatively affect spending and U.S. economic growth in 2014.
