According to a report from the Wall Street Journal, "economists aren't known for their forecasting flair, but they got 2013 pretty much right, correctly reckoning that increased taxes and decreased federal spending would drag on growth at the start of the year, and gradually fade. The consensus among economists surveyed by The Wall Street Journal last January called for gross domestic product to grow a tepid 2.3% from the fourth quarter of 2012 to the fourth quarter of 2013—which looks close to the mark".
Wall Street stock-market strategists, on the other hand, didn't do a very good job at all, projecting that the S&P 500 would rise 8.2% in 2013, according to a Birinyi Associates survey. It rose 30%.
Even though U.S. corporate profit margins seemed stretched to the breaking point at the end of 2012, they expanded more in 2013. More important, stock valuations got considerably richer: At the end of 2012, the S&P traded at 12.4 times expected earnings, according to FactSet, and now the forward price/earnings ratio is 15.4.
Going into 2014, the economy is poised to do a lot better than last year. The drag on growth from the fiscal tightening that ushered in the start of 2013 is mostly gone. Recent reports show that both hiring and capital spending—two aspects of the economy that have been decidedly disappointing in recent years—have begun to pick up.
A number of economists, including some who have been fairly downbeat throughout the recovery, like Jan Hatzius of Goldman Sachs and Ethan Harris of Bank of America/Merrill Lynch, are forecasting GDP in the fourth quarter of 2014 will be at least 3% higher than year earlier. That would mark the best year since 2005.
''But better hiring and capital spending aren't the stuff of expanding profit margins. So investors can't count on earnings at companies' U.S. operations advancing any faster than the economy.
A better economy also will set markets to wondering about when the Federal Reserve will start raising short-term rates. This could pique worries that yield-hungry investors will shift money away from stocks into fixed-income products.
And a better economy will make for improved investment opportunities away from financial markets. There has been a dearth of new business formation in recent years; perhaps 2014 will see more people cashing in some of their stock-market wealth to try something new.
It is, of course, possible that despite such hurdles, 2014 will be another big year for the stock market. A rerun of this year's rally would be built on unsustainably high profit margins as well as valuations that were even more strained''.
