From the March 2014 issue of Futures Magazine • Subscribe!

Can equities stand on their own in 2014?

A considerable number of the working age population have dropped off unemployment rolls or are no longer seeking employment. The Bureau of Labor Statistics data shows workers remain discouraged and many are unable to find full time employment, or have given up trying. This is worse than the 9.7% unemployment. At least when we were at 9.7% those people that dropped off had some sort of income, even if it was only unemployment benefits. It is a vicious cycle; if people are not working then consumer spending decreases, if consumer spending decreases then earnings go down, if earnings/profits go down so does the stock price along with  corporations having to lay off or at the very least not hire or expand. 

Some will argue that there are strong corporate profits. True, we are seeing positive earnings, but are they sustainable without the revenue growth needed to feed it and a healthy jobs market? 

What we are seeing to achieve these earnings are lower wages and under employment, not revenue growth. Short-term this in conjunction with the intervention by the Federal Reserve can support a bull market, but long-term the market will directly correlate to the macroeconomic data and the lack of employment. 

The employment-population ratio from the Bureau of Labor Statistics shows that the percentage of people working is no better today than it was three years ago (see “Standing in place, below.)

There are just as many, if not more, bulls out there as there are bears; each equally able to defend their opinion on why the stock market should move lower or why it will continue the bull trend in 2014 and that this is merely a healthy correction. 

Jeremy Boston of Boston & Zechiel Management says, “I believe we see the market remain strong into spring and a correction going into summer with a strong market after that until year-end.” He adds, “Tapering will not negatively affect the market because the Fed is cutting purchases minimally per month and there is still a lot of money being put into the economy.” 

Realistically we can see the S&P trade down to 1624.00 or a 38.2% retracement from the June 2012 low and still be in a bull market (see “Tech talk: Small correction, large correction or new bear?"). With the market getting shaky at these levels, we will start to see continued profit taking and a shift in investor demand from stocks. 

There’s a chance we’ll see a completely different market this year with a major spike in volatility — which has been suppressed for a very long time — and large swings, but ultimately moving lower. 

It is too early to tell if this is only a correction or a turnaround in the market. But if equities can sustain a massive bull move in the challenging economic conditions of the last five years, they can suffer losses in a stronger economic environment without support from the Fed.

Frank Cholly began his career in 1998 at the CBOT’s Treasury bond and soybean pits. He then expanded his brokerage duties to senior commodities broker at Lind-Waldock prior to joining RJO Futures in 2011. He can be reached at  

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