U.S. stock markets closed 2013 after a record setting year, posting some of the highest year-to-year gains in history. So investors started off 2014 on optimist ground, right? Actually, U.S. stock markets posted losses as investors cashed out on profits! This has caused S&P 500 futures to start the new year off in the red.
S&P futures essentially measure what direction investors believe the S&P 500 index will move in the future. This index measures the value of 500 of the United States largest and most important public companies. Right now, it appears that investors believe that stock markets will cool off after weeks of gains and in the face of a strengthening dollar. As the dollar strengthens, investors will likely pull money from stocks to invest in dollars.
The U.S. dollar is set to strengthen as the Fed rolls back its stimulus plan. To make a long story short, the Fed has been creating money and injecting it into the economy to increase liquidity and investment. An increased supply in the dollar has suppressed its value. However, announcements in recent weeks suggest that the Fed will roll back its “quantitative easing” program in the near future. This will result in a stronger dollar, which may deflate stock prices.
Cooling S&P 500 Marks First New Year Loss Since 2008
Not since 2008, amid the “Great Recession”, have stocks started off the year in negative territory. The start of the new year has usually been a moment of optimism, whether warranted or not. Investors, however, broke that trend with a poor performance this past Thursday.
At first glance, it might seem odd that stocks started lower after enjoying one of the best years in recent memory. On the other hand, many analysts believe that last year’s exuberance led to this year’s pull back. Why? Some investors got cold feet and came to believe that markets be over-heated. Better to cut losses now and pull out of the market. At least, that appears to be what some are thinking.
With stocks declining, futures have also headed south as investors began to share sentiments that markets are due for an adjustment. Judging by the decline in S&P 500 futures, which predict prices in the coming days and months, many investors also believe that losses will continue in the trading sessions ahead. Of course, it’s fair to wonder if these investors are right, or if lower prices could lead to a bounce back.
S&P Futures May Gain as Economy Grows
Despite the negative results to start the year, many analysts believe that the U.S. economy is set for a strong recovery in 2014. If so, than stock markets will almost certainly rise, and as outlooks improve, futures should also improve. What does that mean? It means that S&P 500 futures might represent a great investment opportunity.
So why should the U.S. economy be in-line for a recovery? For one, unemployment numbers are declining, while demand and output are rising. Years of pent of demand and saved-up cash could also lead to short-term boost as companies and individuals make up for lost ground with new purchases and investments. This could spur a period of economic expansion.
To be clear, no investment is ever guaranteed, but if the U.S. expansion does materialize, stocks should be among the biggest beneficiaries. That, in turn, means that outlooks will improve, which generally leads to rising future prices. So for investors looking to invest in stock futures, the recent decline in prices might actually present an investment opportunity.
If S&P 500 futures and other futures are undervalued, than now might be the best time for savvy investors to invest. As the initial negative sentiments cool off amid a strengthening economy, investors might yet again warm to investments. Investing in futures is always a high-risk investment due to speculation, but now is a great time to at least consider S&P 500 futures.