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A bull-market year ends; a hazier one begins

Gains like 2013’s unlikely to be repeated, but hope abounds

The Dow rose past 14,000 for the first time in February, and past 15,000 in May. It ended the year at 16,576.66.Richard Drew/Associated Press/File 2013

Now that’s what a bull market looks like.

Investors just walked off with their best annual stock market results in more than 15 years. The Standard & Poor’s 500 index jumped 30 percent, better than in any year since 1997. The Dow Jones industrial average soared 26.5 percent, its best performance since 1996. Both benchmarks closed the year at record highs Tuesday.

The year was part of a powerful bull market that began in 2009. That climbing stock market has pushed the S&P 500 up by more than 173 percent over nearly 58 months — a gain and duration strikingly close to the average of 13 previous bull markets, stretching back to the 1920s.

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The roaring stock market of 2013 produced widespread gains. All but one of the Dow Jones 30 industrial companies rose in value, while nine of every 10 stocks that make up the S&P 500 advanced. Generally, smaller stocks performed even better than larger equities.

Predicting how stocks might perform in 2014 depends on what prognosticators believe moved the market so much higher last year. Are current equity prices based on the sound fundamentals of a slowly improving economy, or on artificial stimulus injected into the market by the Federal Reserve?

The investors who are focused on economic fundamentals see cause for last year’s remarkable surge in equity prices. They are hopeful that both the economy and markets will continue to improve in 2014, though not at last year’s blistering stock market pace.

“There’s a misapprehension out there,” said Jim Swanson, chief investment strategist at Boston-based MFS Investment Management.

“I hear and understand all the talk about bubbles and what may be causing it. But there are [economic] fundamentals supporting this market, and I think the fundamentals can continue through 2014. It’s going to be a decent year. We’re not seeing a recession out there.”

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Swanson ticked off all the good trends that he said occurred over the past year and could continue through 2014: company earnings that rose faster than the markets, low corporate and consumer debt, and the absence of rapid credit expansion, which, he says, often precedes trouble.

Mark Zandi, chief economist at Moody’s Analytics, also sees better times for the economy and stocks over the next 12 months. But Zandi, like others, does not think equities can come close to matching last year’s gains.

The nation’s unemployment rate declined to 7 percent in November, from 7.8 percent at the start of 2013, and could fall to as low as 6.25 percent by the end of 2014, Zandi said. That would help companies as more people find work and spend money, fueling the overall economy and filling corporate coffers, he said.

The housing market has steadily improved, while US gross domestic product grew an impressive 4.1 percent in the third quarter, the latest data available, Zandi said.

The economy might even get a bit of a break this year from the seemingly constant federal budget and debt-ceiling battles between Republicans and Democrats in Washington.

Zandi noted that a budget deal reached late last year will dramatically soften the blow of planned “sequestration” cuts that hurt industries heavily dependent on government spending last year.

“This should be a breakout year for the economy,” Zandi said, adding that he thinks stocks could increase 5 to 7 percent in 2014, on average.

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But not everyone is buying that somewhat rosy outlook. Others say the economy and stock market have been propped up too long by Federal Reserve policies that they see as causing monetary and market bubbles that can only lead to trouble.

Among other things, market skeptics point out that the Fed has been buying up mortgage and Treasury securities at the pace of about $85 billion a month, while keeping short-term interest rates at or near zero percent for years.

Encouraged by data showing an expanding economy and slowly falling unemployment, the Fed recently said it will gradually reduce and eventually eliminate its massive bond purchases. But it plans to keep short-term interest rates at the current low levels for at least a few more years.

To the Fed’s critics, the slow phase-out of policies designed to stimulate the economy really doesn’t matter. They believe the damage has already been done.

“I certainly don’t think the recent market performance reflects economic fundamentals,” said Lou Harvey, president of Dalbar Inc., a Boston financial research firm. “I think it’s all a reaction to the Fed effectively printing money. A blind monkey could have made money in this market.”

Harvey declined to predict how the economy and markets might fare in 2014. “It’s really a wild and crazy guess when this is going to end — or exactly how this will end,” he said. “We’re in new territory here.”

But John P. Hussman, a high-profile stock market bear and head of the Maryland-based Hussman Funds, is making calculated guesses. Warning that stocks are overvalued, he recently wrote that it was “plausible” for the S&P 500 to lose 40 to 50 percent relatively soon.

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Market forecasters who fall somewhere between the optimists and pessimists see 2014 as a key year to make a transition away from the Fed’s stimulus to sustained economic growth.

Rick Lacaille, global chief investment officer for Boston’s State Street Global Advisors, said he’s glad the Fed has started to pull back on its most aggressive tactics. “Long-term, it was simply not sustainable,” he said. “But I very much like its gradual approach. It’s not a sudden withdrawal that will disrupt the economy and markets.”

It’s time to see if the economy can start standing on its own two feet, and Lacaille said the early evidence suggests that it can.

“So far, the recovery has been good for Wall Street and not so much for Main Street,” Lacaille said, “but I think that’s about to change. The economy should start picking up.”

As for stocks in 2014, it’s not going to be a boom year like 2013. “But there’s still room for gains,” Lacaille said.