Blog : Penny Stock Week/Year: What to Expect in 2014

by Ed Zwirn on December 30th, 2013

The stock market is trading sideways so far on this, the penultimate trading day of the year, following a report this morning which highlighted continuing weakness in the real estate sector.

According to this latest, pending home sales for November, which had been expected to show a 1.2% rise, instead posted an anemic 0.2% gain. While this was a disappointment, it was all the same an improvement over October's 1.2% drop, which itself had been revised from the previously reported 0.6% decline.

This follows a week which saw the market for everything from penny stocks to blue chip shares rally, with the Dow Jones Industrial Average closing Friday at a record 16478.41, up 1.6% from the prior week's 16,221.14. Penny stocks and mid-sized companies participated in last week's rally, with the NASDAQ Composite and the small-cap Russell 2000 each up 1.3%.

--The week kicked off bullishly with Monday morning's report showing a 0.5% rise in personal spending in November, following November's upwardly revised 0.4% rise, despite an increase of only 0.2% in personal income.

--Tuesday durable goods orders report showed a higher-than-expected 3.5% rise for November, following a 0.7% (revised from1.6%) fall the previous month. Excluding transportation, the increase also beat expectations by showing a 1.2% rise, a pickup from October's upwardly adjusted 0.7% increase.

--Also on Tuesday, the November new home sales figure proved to be a pleasant surprise at 464,000, beating the 433,000 consensus. October's report benefited from an upward revision, to 474,000 from 444,000.

Looking ahead to this abbreviated trading week:

--Thursday, the first day of trading for 2014, will see a construction spending report for November expected to show a 0.8% rise, the same rate of increase seen the prior month.

--On Friday, December auto sales will be watched for any change from November's 5.7 million tally. Truck sales, which came to 7.1 million in November, will also be released.

Looking a bit farther ahead, Jan. 10's December jobs report will hold center stage as the market gets back to full-time operation. As I wrote in one of my earlier penny stock blogs, November saw the addition of 203,000 jobs, following October's 200,000. The unemployment rate declined in November to 7%, from 7.2%.

Looking Ahead This Year

The U.S. equity market will continue to be a welcoming place for investors as the New Year starts, at least if recent history is any guide to the near-term future. The stock market kicked off its first trading day of 2013 with a Dow gain of over 300 points, as investors rushed in to take advantage of what they correctly saw as bargains.

Whether or not this opening-day performance repeats itself this time around, January is ususally a month which sees investors in penny stocks and other small-cap companies score outsized gains. As covered in a November penny stock blog, this outperformance, is called the "January effect," a name given to the tendency for stocks--particularly penny stocks--to perform better in January than the subsequent months of a given year.

It seems to have worked out that way in 2013. In January, the Russell 2000 index, useful as a measure of small-cap stock performance, went from 849.35 to 902.09, beating the Dow to gain 6.2%. In contrast, the 11 months since then have seen the index gain about  2.6% per month.

But, however January itself plays out, the recent relatively strong showing for U.S. economic indicators bodes well for the stock market going forward. This was underscored by the Dec. 20 third revision of the gross domestic product estimate for Q3 2013, which showed a much better-than-expected 4.1% increase.

This economic growth, the best showing since the economy expanded 4.9% in Q4 2011 and a sharp pickup from Q2 2013's 2.5%, increase, is either a statistical fluke or the start of a longer-term acceleration of economic growth. We will begin to see which of these is the case on Jan. 30, with the release of initial GDP estimates for the final quarter of 2013.

If this report (and subsequent revisons on Feb. 28 and March 27) shows that this growth trend is continuing, look for economists to upwardly revise their estimates of U.S. economic growth for 2014 from the 2% to 2.5% earlier predicted.

That being said, expect stock market swings to widen this year as the U.S. Federal Reserve continues to cut into the $85 billion monthly bond-buying program, or "quantitative easing," as the year progresses.

According to the median forecast in a Bloomberg survey of 41 economists conducted on Dec. 19, the day after the Fed announced that it would cut into these pruchases by $10 billion monthly starting in January, the central bank will probably reduce its purchases by $10 billion in each of its next seven meetings before ending the purchases in December.

This gradual "tapering" will of course pose challenges to investors as the year progresses. On the other hand, this monetary policy trend has already been priced into the market, at least if the sharp upswing in stock prices since Dec. 18 is taken into account. 

P.S. Happy New Year!