World markets have been on a long winning streak, doubling on average since their lows in 2009. The upward trends continued in 2013, as many indexes rallied to all-time highs.
However, as 2014 comes, investors grow more concerned. A poll conducted by CNBC, a major American media outlet, showed that 40% of investment advisers believe that U.S. stocks will have a 10% correction in 2014. As the recent economic crisis has shown, what happens in the U.S. echoes globally.
Reasons for the Rally
Several factors have helped the current bull market, the most important being the U.S. Federal Reserve’s quantitative easing (QE) program. In December, The Fed announced that will slightly reduce its purchases of USD$85 billion a month worth of bonds. World stocks surged to their highest levels yet on the day of this announcement.
The Wall Street Journal stated that “the Fed’s decision to start winding down its bond-buying program had a little something for everyone. It appeased those who had been calling for the Fed to pull back some of its accommodative policies, yet it also wasn’t drastic enough to rattle markets.”
Japan, the world’s third largest economy, also started their own bond-buying program in 2012, which is similar in nature to the U.S’s. This helped the Nikkei index soar by over 100% and prompted a more regional boom.
Is a Correction Due?
Looking at fundamentals, the rise in stocks has been supported by higher than expected earnings of companies worldwide. Solid economic numbers from many countries, as well as loose monetary policies from the U.S. and Japanese central banks have also contributed to the stock market’s winning streak.
But there are still worries surrounding the global economy. Europe may become a concern for investors again, which has been the case for the past four years. Disappointing reports have been coming out of China as well. Chinese manufacturing growth slowed for the last 3 months of 2013, and the fast pace of the country’s rising debt has also alerted investors. A crisis in either of these two regions would surely pressure stocks.
Investors may wish to play defensively in 2014. Shorting individual stocks that are overbought or buying “beaten down” stocks that are lower than fair market value may protect your portfolio during a correction. On the other hand, diversification into different asset classes is recommended for any investor regardless of their circumstances.