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US stocks seen gaining in 2014 despite weak start

New York – US equity markets ended the old year with a bang and opened the new year with a whimper as investors cleaned the slate following a rousing 2013.

Both the Dow Jones Industrial Average and the S&P 500 Tuesday closed the year at fresh all-time highs. But a pullback Thursday and mixed trade Friday tilted the week into the red.

The Dow suffered the smallest loss for the week, slipping 8.42 (0.05 percent) to 16,469.99. The broad-based S&P 500 declined 10.03 (0.54 percent) to 1,831.37, while the tech-rich Nasdaq Composite Index fell 24.68 (0.59 percent) to 4,131.91.

Analysts advised not giving too much weight to the weak kickoff to 2014, in part because trading volumes are still depressed with some money managers still on holiday and others away due to a major snowstorm in the Northeast.

Also, many investors likely took profits once the calendar changed and a new tax season got underway. Some portfolio managers ”did not want to take gains and have to pay (2013) taxes on those,” said Michael James, managing director at Wedbush Securities.

Investor sentiment towards the new year remains generally positive in light of strengthening US economic indicators and a relatively clear strategy from the US Federal Reserve on unwinding its massive stimulus program.

Tempering that optimism is a sinking sense that equity markets will not be able to top the barn-busting run of 2013 in which the S&P 500 rose nearly 30 percent and broke its all-time record 45 times.

”I don’t think it’s going to reach last year’s gains,” said Lee Munson, chief investment officer at Portfolio LLC, who predicted a 5 to10 percent rise in the S&P 500 in 2014.

Munson said a recent stream of positive data on jobs and manufacturing activity has persuaded the market the recovery is for real. ”Something would have to go wrong” with the economy to change sentiment, he said.

Dan Greenhaus, chief global strategist at BTIG, said an 8 to 10 percent rise in markets in 2014 should be ”easily achievable” in light of the strengthening economy.

Greenhaus said the industrial sector, an outperformer in 2013, should continue to do well in an improving economy. He also likes technology companies, but said some financial stocks still face regulatory and litigation risks.

Sam Stovall, chief investment officer at S&P Capital IQ, offered an old adage in handicapping sectors: ”Let your winners ride, but cut your losers short.”

The axiom suggests loading up on consumer discretionary  stocks (+41 percent in 2013), health care (+38.7 percent) and industrials (+37.6 percent) and going light on telecommunications (+6.5 percent) and utilities (+8.8 percent).

Additionally, materials stocks, which rose 22.7 percent in 2013, could be braced for a bigger year if emerging-market economies rally in 2014, Stovall said.

Meanwhile, Goldman Sachs highlighted 40 stocks with low valuations as good bets in the first part of 2014, including Wal-Mart Stores, Ford Motor, Target, Tenet Healthcare, Citigroup and Cisco Systems.

The flow of corporate news is expected to pick up again next week with the first earnings reports of the season from Monsanto and Alcoa and likely some announcements from other companies that have either beaten or fallen short of expectations by a wide margin.

Technology and electronics companies are also expected to be in the news at the annual CES trade show in Las Vegas.

The economic calendar next week includes December service sector activity (Monday), the November trade balance (Tuesday), and the December jobs and unemployment report (Friday).