Bumper year expected for US equities

Strong US equity market performance throughout 2013 bodes well for the next twelve months, but key issues will dictate how the market develops.

Strong US equity market performance throughout 2013 bodes well for the next twelve months, but key issues will dictate how the market develops.

How will the US equity market perform in 2014?

If the S&P 500 or Dow Jones Industrial Average are anything to go by, the US equity market had a bumper year in 2013, which may spill over into the start of 2014 as portfolio managers allocate start-of-year strategies.

In 2013, the Dow alone grew 23.5% to 16,576 points by the end of the year from a beginning of 13,412, catching a number of asset managers off-guard – as index funds outperformed a number of hedge and institutional funds. But, overall, the positive activity was enjoyed across the spectrum of participants and expectations of continued, stable growth of US equity markets into 2014 are widely shared. 

Will the Fed’s beginning of tapering slow growth?

The US Federal Reserve’s first reduction of the monthly bond buying programme – whereby its shaved US$10 billion off the US$85 billion initiative – was outgoing chair Ben Bernanke’s goodbye waive to the markets and had the opposite effect of his mid-year comments.

In June, when Bernanke hinted that reducing the programme would naturally occur when markets strengthened, the equity market reacted with volatility. But, ultimately, tapering the bond-buying programme will benefit equities as investors reverse the 2008-inspired shift from stocks to bonds, which would have added to the strong end of year equity market performance.

Incoming chair Janet Yellen’s first meeting running the Fed will occur in March, and she has already suggested a measured approach to tapering in order to avoid the volatility seen in 2013. 

Will any market structure issues affect volumes?

The Securities and Exchange Commission is pursuing a number of initiatives to improve efficiencies in the US equity market, but their impact on the market will be muted compared to the impact on asset managers’ trading activities.

One change, focused on small- and medium-sized (SME) companies under the Jumpstart Our Business Startups Act, seeks to widen tick sizes for SME stocks to attract greater investor participation. This would reduce the risk for traditional asset managers to take significant positions in smaller companies – seen as drivers for the economy that aren’t represented on stock markets – and let institutional investors enter and exit positions without being ‘gamed’ by other participants.

Whether long-only buy-side firms will support such a plan by buying into SMEs is unknown. A side-effect of such a pilot programme could be the growth of initial public offerings, which picked up in the past year after a long period of low activity that has raised questions over the key role of equity markets in light of new ways of raising money, such as crowdfunding.