Do U.S. Stocks Have Room to Rise?

Markets Await Fed Announcement On Stimulus
Spencer Platt/Getty Images
By Leslie Shaffer

The S&P 500 (^GPSC) may have clocked up gains of more than 27 percent this year, but some analysts believe U.S. stocks still have more room to rise.

In the wake of the Federal Reserve's decision to begin tapering its asset purchases from $85 billion a month to $75 billion, starting in January, some analysts are concerned the U.S. market may lose ground amid a potential decline in liquidity.

But others remain undeterred.

"The Fed will be supplying fewer reserves [and] will be less accommodative than it has been, but it will still be aggressively accommodative by historical standards," said Dennis Gartman, the editor and publisher of The Gartman Letter.

"They're not taking any money out of the system. They're simply putting less money into the system," he told CNBC. "The economy itself is doing very well," he noted.

In the third quarter, the U.S. economy grew 3.6 percent from a year earlier, according to data from the Commerce Department.

"It will be years before the Fed has actually begun to tighten monetary policy. And in the past it has taken tightening to inspire a recession; it has taken tightening and an inverted yield curve to have a deleterious impact," he said. "I'll be very simplistic and say the trend [for stocks] is going from the lower left to the upper right."

Others also expect further gains in U.S. stocks.

"I do think equities are still going to move forward," Lorraine Tan, director of equity research at S&P Capital IQ, told CNBC, citing valuations. Despite the advances so far this year, "you're not talking valuations that are so exuberant yet that you're going to have a steep fall," she said

But she noted equities may not have a straight line up.
"We're still expecting some sort of pullback during the course of the year because at these levels you obviously have a little less room for errors," she said. "We're looking at about 8-10 percent upside for most equities."

To be sure, some are convinced shares have risen enough.

"What's kept up the market is liquidity. It's not the economy," said Uwe Parpart, managing director at Reorient Financial Markets.

"I don't see the real economy picking up even as the Fed is beginning to withdraw accommodation," he told CNBC. While third quarter economic growth appeared strong, nearly half of it was due to inventory buildup, while real wages have been declining, he said.

Inventories in the third quarter rose to $116.5 billion, the largest increase since 1998, and accounting for 1.68 percentage points of the rise in gross domestic product in the quarter.

"I'm not saying the U.S. market is going to collapse. I'm just saying it's not going to outperform the way it did this year because what has driven this year's outperformance has been massive increases in liquidity," Parpart said. "2014 will see significant decreases in the actual liquidity creation."

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Tech bubble anyone? Y2K? The Fed?

December 23 2013 at 11:46 AM Report abuse +1 rate up rate down Reply

Is Wall Street Greedy? Duh! Of course, why not have 2 Santa Rallies this year - orchestrated announcement by the FED Clown last week which pumped their worthless stocks again wasn't enough - it's never enough..

December 23 2013 at 8:12 AM Report abuse +2 rate up rate down Reply