What’s in Store for Wall Street and the Markets in 2014

From the boom in American energy exploitation to the tapering of quantitative easing, the economy is heading for a prosperous New Year. REUTERS/Lucas Jackson

Remember 2013? The Dow banged to a record high, even against a rising Greek chorus of investors warning of the possibility of another flash crash. (To be sure, there was a computer glitch in April that shut down the Chicago Board Options Exchange for half a day, but otherwise the Cassandras were disappointed.)

The shutdown of the federal government for two weeks in October churned markets as part of a long series of self-imposed wounds inflicted by the bifurcated Congress, which fought with itself over the fiscal cliff, the debt ceiling, sequestration, you name it.

The implications of cyber-terrorism came out in full force as the markets swooned on a false report from a hacked Associated Press Twitter account saying the White House was under bomb attack and President Barack Obama had been injured.

Twitter itself fared better, staging a perfectly executed IPO that paved the way for similar launches by other successful tech-sector darlings, like Snapchat, Spotify, Dropbox and Pinterest.

Virtual currencies such as Bitcoin barreled into the public consciousness in 2013, with Fed chief Ben Bernanke surprising the market by declaring they “may have long-term promise,” even as Bitcoin spiked and crashed and spiked again on waves of frenetic buying and selling.

To the surprise of most people, who had become used to America being dependent on Middle Eastern oil sources, in 2013 the U.S. became the biggest producer of oil and gas on the planet, surging ahead of Saudi Arabia and Russia and causing energy prices to slump.

So what lies ahead for 2014? A sneak look into Wall Street’s crystal ball:

1. Fill her up! Energy prices will be uncharacteristically stable: Due to advances in drilling technology, the U.S. is the new Saudi Arabia. This is probably the best news of the past year for the regular-Joe consumer and will continue to deliver good news and increased prosperity throughout the New Year. Why? Because unlike almost every other silver bullet that’s supposed to fire up the economy, this one actually works. The advent of dropping energy prices puts money back in the pockets of ordinary Americans and consumers the world over, giving them cash to spend and thereby stoke other parts of the economy. As well as the obvious benefits, such as boosting global car sales, lower energy prices are set to cut costs across all sectors. “The unexpected rise of U.S. oil production and technological advances have significantly transformed the way we live today and will continue to do so in the future,” says Deutsche Bank in its outlook for 2014.

2. Cold turkey, here we come! The U.S. will wean itself off its monetary stimulus addiction: But, like beating heroin, this is not going to be easy. The cold, hard truth is that, more than five years after the financial crisis, the U.S. economy, along with those in many other countries, remains steeped in the business of what economists call “recession avoidance.” Without continuing monetary stimulus measures -- known as quantitative easing, or QE -- there is a fear the economy will not continue its slow and sluggish recovery. The new Federal Reserve chief, Janet Yellen, will ease off the gas pedal – but if she “tapers” too hard or too fast, the stock market’s spate of frothy gains will falter and send a chill through the rest of the economy. Fasten your seatbelts, it could be a bumpy ride.

3. Home Sweet Home! Home prices will drop in the U.S. and rise in the U.K. “Tapering” by the Fed will result in higher borrowing costs for home buyers, which could slow down the pace of sales and price gains for the nation’s housing market, which saw upticks throughout 2013. At the other end of the housing spectrum, the U.K., which suffers a chronic shortage of high-end housing in its burgeoning capital, is forecasting double-digit gains in its home prices in the New Year, with home sales growth projected in all parts of the country after a surprise surge in buying this year.

4. Isn’t it rich? ‘Wealth Effect’ to reign supremeConsumer spending has perked up, with holiday shoppers contributing to an uptick in the economy in 2013 – MasterCard SpendingPulse reported a respectable 3.5 percent leap in this year’s holiday sales. But the big, more dubious spending and growth gains are coming from the “wealth effect” provided by the world’s top earners, who are enjoying sharp increases in stock and housing prices –  fueled by the Fed’s monetary stimulus measures. This kind of growth is less durable than growth across a broader demographic because it can turn on a dime if stock or housing prices dip. In the New Year, economists will be looking for more durable growth in the form of sustained increases in salaries and jobs that promise to prop up the blue collar and middle class and will underpin sustained growth in the long term.

5. Back to work! Jobs are poised to grow – finally, if tentatively: With the divided Congress at last appearing to back away from its wonkier skirmishes, from fiscal cliffs to financial reform, many economists see 2014 as the year of a jobs renaissance. The budget deal and a break in warring on Capitol Hill would allow businesses to overcome what has been a key confidence hurdle – serious and deliberately disruptive financial uncertainty – and get ready to invest in the future, which will create new jobs. Judging by the robust economic data closing out the year, this trend may have already begun as companies are already stepping up hiring.

6. Breaking Down Barriers. Trade agreements could spark international growth. Looking for creative ways to incite further growth domestically, many countries, including the U.S., are favoring trade agreements that will lower barriers, costs and roadblocks to cross-border investments and partnerships. Among the pacts in play are the Trans-Atlantic Trade and Investment Partnership between the U.S. and European Union, and the Trans-Pacific Partnership, which has been beefed up to include a dozen countries, including the U.S., Japan and South Korea. “With steep domestic challenges, policy-makers seek to create growth via the international stage,” says Morgan Stanley’s outlook for 2014. “The improved cooperation leads to more solid pick-up in trade and more sustainable growth in the global economy.”

In brief, the Wall Street crystal ball reveals that though the deep wounds and the hard times of the financial crisis have yet to fully heal, 2014 is shaping up to be a year that could make big strides in restoring the world to prosperity.

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