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Will the ASX follow the US higher in 2014?

2013 has been a great year for investors in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and US S&P 500 (SNPINDEX: ^GSPC). The year was characterised by a strong start through April and May as the Australian and US share markets rose by over 10% in the first five months, before a mid-year correction took Australian shares back into the negatives. Meanwhile, US shares retreated only 5% to open up a 9% buffer between the two indexes.

The over-sized corrections on the Australian market setup the gains for the remainder of the year; a 13% gain for the ASX and a 25% gain for the US S&P 500. Investors in both markets have witnessed a strong positive correlation between the two share markets and 2014 is expected to be much the same.

This could be great news for Australian investors as US share market analysts have been predicting another strong year for the S&P 500 based on research that concluded:

Whenever the S&P 500 rises 20% or more in a calendar year, the next year has been positive nearly 80% of the time, logging average gains of 10%.

When stocks have posted an advance of 30% or more in any year, the S&P 500 returned an additional 14%, on average, the following year.

The big question then remains, what will happen in Australia?

The majority of forecasts that this Foolish investor has read indicate a 5-7% gain is probable in 2014. However no one can really know until this time next year. As such, Foolish investors should do the same thing they did in 2013, and 2012, and 2011, buy high-quality companies with quality management at attractive prices.

Warren Buffett is well known for reminding investors that past returns are no guarantee of future performance, and this will likely be true in the years to come. High-yielding stocks such as NAB (ASX: NAB), ANZ (ASX: ANZ), and Telstra (ASX: TLS) have performed so strongly over the past 18 months that similar returns are unlikely in 2014. However, low interest rates will likely support the share price in times of market weakness. Conversely, companies delivering growing revenue and profit should be rewarded by investors and outperform high-dividend payers.

As always, quality companies with strong management should fit into this category. Packaging group Amcor (ASX: AMC), building materials group Boral (ASX: BLD), casino group Crown Resorts (ASX: CWN), and big miner BHP Billiton (ASX: BHP), are all expected to grow strongly in 2014 and have excellent management teams pulling the strings.

Foolish takeaway

2014 will be no different to years past, or years in the future. Investors holding shares of quality companies purchased at good prices will fare better than the average investor taking a punt on ‘hot’ or speculative stocks. High-yielding stocks have performed well over the past 18 months and low interest rates should continue to see share prices well supported.

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Motley Fool contributor Andrew Mudie owns shares in BHP Billiton.

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