The Three Vital Signs to Watch in 2014

Stocks have had their best year since 1997, and there’s no denying the powerful bull move in equities. There’s also no denying that the economy is getting better, as employment metrics and the recent third-quarter gross domestic product (GDP) revision to 4.1% clearly indicate.

So, will stocks continue to do well in 2014? What about bonds? Will interest rates continue their big climb?

As a market advisor, I am constantly asked about what investors should be paying attention to in order to sidestep potential speed bumps in the financial markets. Well, the way I see it, right now there are three vital signs to keep track of in 2014.

The first vital sign I’m monitoring is interest rates. The 10-Year Treasury note yield is the benchmark for the cost of capital, particularly when it comes to mortgage rates. If we were to see rates spike to the 3.5% level and remain there for a significant period, that situation would be a warning sign for a potential slowing in the mortgage and housing markets, as well as the equity market.

The second thing to watch is simply the price action of equities via the broad-based S&P 500 Index. For more than a year now, we haven’t seen a really significant pullback in equities. Certainly, we haven’t come close to seeing the S&P 500 break below the 200-day moving average. If, however, we see stocks start to falter below their short- and long-term trend lines, the selling could start to get very uncomfortable for the bulls.

The final vital sign to keep track of is something called credit spreads, which simply put, are the difference between low-quality junk credit and higher-quality Treasury credit. One way to keep track of credit spreads and their price action is via the SPDR Barclays High Yield Bond ETF (JNK).

The direction of JNK can be viewed as a sort of canary in the coalmine in terms of credit problems. In 2008, junk bond values plummeted, and that was the first sign of fiscal sickness in the economy. So far, we haven’t seen junk bond values falter. In fact, they’re trading near a new 52-week high.

If, however, we start to see this metric falter, it could be the harbinger of bad things to come in 2014.

By monitoring these three vital signs, you’ll be able to get a distant early warning on the potential grand designs in the financial markets in 2014. That situation will help you plan your mission in the year ahead, and it will help determine the way the wind blows in the months to come.