Top 3 factors that will drive stocks in 2014

If there’s one thing every single investor would love to have handy when it comes to building a portfolio, it’s a crystal ball. While it’s impossible to say what 2014 will bring in the stock market, experts can make educated guesses when it comes to what factors may drive equities higher in the year ahead.

There are three that stand out.

Employment growth

The North American job market hasn’t exactly been robust over the last few years, especially in the United States. But things are looking up.

“We’re likely to get a real positive uprise in employment,” says Cameron Reid, chief investment officer at Calgary’s WealthCo Asset Management. “The drag that we’ve seen from tax cuts in the U.S. and reduced government spending is not completely finished, but the heavy lifting is over ... There’s a really good chance of meaningful wage increases for middle- to upper-middle class income earners. A lot of people have been out of work for a long time in the U.S., and corporations now have the purchasing power to bid up this large pool of labour," he says.

Similar optimism exists north of the border, which will play a role in domestic investor sentiment. “In Canada, a more consistent improvement in job growth will go a long way to offsetting consumer indebtedness and the softening of the housing market,” says Edward Jones investment strategist Craig Fehr.

A stronger job market means increased consumer confidence, which likely means more spending. Consumer consumption makes up about 70 per cent of the U.S. economy and 60 per cent of Canada’s.

“With good [job] growth happening, we’re likely to come into a better position over the next 12 to 24 months,” Reid says. “It will drive markets higher.”

Global economic growth

“The number one driver of investment returns in 2014 is the pace at which we see global economy improve,” Fehr says.

Several elements are behind the upswing. U.S. stocks have been on a tear for the past year, and momentum in America's recovery has taken hold.

“We started to see a little less pessimism around emerging markets, most specifically around the Chinese economy,” Fehr says. “We started to see a little more optimism around the prospect for growth in Europe. We got a little more evidence that the economic turnaround plan in Japan, while certainly full of risks, is gaining a little more traction than I think some might have feared.”

All of those factors point to a boost to the Canadian economy, which will get some help from more activity in the exports sector as a result of increased foreign demand.

Earnings growth

For the past few years, companies have driven profits largely by cutting costs. However, global economic growth should provide a solid base for sales and earnings and support stock market performance, Fehr says.

“While we anticipate better economic growth, we expect more moderate gains in the stock market, compared to the 20%-plus increase in the S&P 500 in 2013,” Fehr writes in an Edward Jones paper called Outlook 2014: Shifting Gears. “That being said, we believe equities can still deliver attractive returns -- particularly when compared to bonds and cash.”

Remember to adjust expectations

Despite the many positive predictions for the year ahead, don’t expect 2014 to be a smooth ride. In fact, volatility is likely to pick up after a relatively calm 2013.

“It becomes very easy to get spoiled by an equity market that has very low volatility and above-average returns,” Fehr says. “For an investor, it’s important to ask: What are my long-term goals and what’s the portfolio I need to build to achieve those goals?"

“You certainly shouldn’t expect 30 per cent returns, but … the market crash we saw 2008/09 is not the environment we’re going to be in, either,” he adds. “We’ll be somewhere in between. Having realistic expectations for stocks, for bonds, and for the economy as a whole goes a long way to helping investors make much smarter decisions.”