What now for the Dow? Local advisers expect pullback but overall gain

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Posted: Sunday, December 29, 2013 12:00 am

It'll be tough for 2014 to beat 2013's stock market performance, a group of Omaha financial advisers says.

Asked by The World-Herald to project the course of the Dow Jones industrial average, a key market indicator, they predict a midyear pullback of as much as 11.3 percent from recent record levels.

But the most optimistic of the bunch foresees the Dow rising as high as 18.3 percent at some point during 2014, and all nine expect at least a 3 percent gain by year-end.

On average, the Omaha advisers predict the Dow will peak in 2014 at 18,416.07, hit a low point of 15,396.61 and close the year at 18,082.22. That would be an 8.9 percent gain for 2014, on top of this year's 25 percent advance.

“We should have a pretty good backdrop for a healthier economy than we've had,” said Cambridge Advisors' Mike Bridgman, and that could mean a healthy gain for Dow-loving investors, too.

Bridgman said the market's outstanding 2013 increase is partly because investors expect economic growth and higher corporate profits in 2014.

Barring an unexpected drop before Tuesday afternoon, 2013 will be the seventh year since 1975 with a Dow gain of 25 percent or more. The only time that's happened twice in a row since 1975 was 1995-96.

Dan Feltz of Feltz Wealthplan said he expects volatility in 2014 after 18 months without a significant correction. But investors who wait for the market to drop may miss out on gains, as they have since 2009.

Feltz said there's still room for market growth, since the flow of investor money turned toward company stocks only last February. The current bull market may be near its midway point, he said, with no evidence of a recession that would stop it.

Businesses are holding $1 trillion in cash, waiting to invest in expansion and new jobs, he said, and the housing industry is recovering.

“You're going to get confidence back, and that's going to create jobs, grow earnings and add spending on infrastructure,” he said. “A lot of investors have yet to put their cash to work.”

Mark Wynegar of Tributary Capital Management said corporate earnings may remain healthy but seem flatter in 2014, percentagewise, because they must build on 2013's profits.

The rising market increased price-earnings ratios, a measurement that many investors use to decide what stocks to buy or sell. The ratio, also referred to as the price-earnings multiple, compares recent profits with the price of the stock.

The theory is that it's good to invest in a company with a stock price that's low in relation to its per-share profits.

The market's current average price-earnings ratio of about 15 means an investor pays $15 for stock in a company for every $1 of past annual earnings.

“It may be little rocky while (the market) figures out how to rationalize the earnings growth we'll get with the expanded multiples we had in 2013,” Wynegar said. “The market anticipated better growth in 2014. I think the market's going to have to deliver on that to support the multiple expansion we got.”

If earnings disappoint investors, he said, the Dow may decline. But he expects “respectable” gains for the full year, in the 10 percent range counting dividends.

Jeff Sharp of SilverStone Group had the highest Dow prediction at 19,500, to be reached after a “choppy” first half of 2014.

“There's a decent chance we'll be up 10 or 15 percent this year despite the fact that we've had a good year in 2013,” Sharp said. “What ultimately drives stock prices is earnings,” and he expects companies to report good profits in 2014.

Ron Carson of Carson Wealth Management said he expects corporate earnings to rise 11 percent, higher than many investors expect, which could push the Dow to 19,000 at some point next year.

Roland Manarin of Manarin Investment Counsel said a high of 18,000 at the end of 2014 “should be easily achievable.” But in the meantime stock prices may drop 10 percent or 20 percent, a correction that could scare some investors out of the market.

“Even my own clients will call,” he said. “I hold their hands, tell them to take a deep breath, go play golf, go on a vacation, forget about it, you'll be fine.”

Despite risks from government debt and derivatives — Manarin recommends owning some gold stocks and coins as a hedge against disaster — “we probably will muddle through and, with luck, our grandkids will be buying $100,000 cars,” he said, and the Dow average in 2024 will be at 50,000.

Brian Kirkpatrick of Bridges Investment Management said that despite 2013's strong gains, there are signs that 2014 also could be a good year. Past exceptional years often were followed by gains in the 15 percent range, counting dividends, he said.

Kirkpatrick said positive signs include an economy that may grow faster than many expect, and people moving their money from bonds to the stock market as interest rates rise.

George Morgan, an instructor at the University of Nebraska at Omaha, said he expects 2014 to be “a pretty decent year. Everybody moans and groans about the budget deal, but what it means is that the government won't shut down, and it brings some certainty.”

The important thing, he said, “is that we're starting to understand what Obamacare is.”

The Affordable Care Act could cause employers to hold off hiring because they fear a big increase in health costs. But if the law pushes down costs, he said, that could boost earnings and help the market.

Russ Kaplan of Russ Kaplan Investments gave the lowest predictions for the Dow, expecting a year-end gain of 3.1 percent. “I'm a stock picker, and I don't think anyone is a market timer or has been successful at it.”

At this time last year, even the most optimistic of eight Omaha predictors fell short of the Dow's sterling performance. Kirkpatrick and Sharp came closest, predicting a high of 16,000 for 2013 that's already been passed.

Morgan came closest to predicting the Dow's low for 2013 at 13,033, just 295 points below the actual low last Jan. 8 of 13,328.90.

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