INCLINE VILLAGE, Nev. — Stocks are well on the way to rising five straight months and they are up ten out of eleven weeks. This is a bull market, a powerful one now up 10 percent year-to-date on top of last year’s 13-percent gain. Profit-taking from time to time is inevitable and in fact healthy. Expect brief episodes, but they won’t de-rail the bull market.
The generally negative CNBC regulars and many guests assure viewers that the rally they didn’t predict isn’t as strong as it appears (low volume, etc.) and a “correction” is overdue. That word isn’t accurate. It implies that something is wrong and needs to be fixed. There is nothing wrong with stocks trading at these levels. What is wrong is how the naysayers focus on the well-known negatives while they ignore the many positives.
The driving force for the market remains the one I’ve written about again and again. Whether your goal is growth or income, the alternatives to stocks are unattractive. That alone would drive prices higher, but there’s more. Corporations have record profits and the strongest balance sheets ever.
The S&P is not as weighted to financial stocks as it was at the market peak in 2007 when banks were booking phantom profits on soon-to-be worthless mortgage packages, so the quality of earnings today is better. GDP growth is and will remain slow, true, but it’s still growth and acceleration in a better global economy is more likely than a slowdown. Day after day the economic news is a little better.
The energy situation is a huge positive. There should be stronger environmental regulation, but we (North America) could be energy independent this decade thanks to shale drilling. No more imports from the Mideast, Venezuela and Africa.
Another positive is the Fed continues to inject liquidity into the financial system. Despite all the positives, stock valuations (price-earnings ratios) are below their historical average (15), especially compared to times when rates were low (16-17). No, nothing needs to be “corrected.”
The case for higher prices rests in part on a combination of rising (and healthier) earnings and multiple expansion, in other words the best of all worlds. A price-earnings ratio of 16 on higher-quality S&P earnings estimated to be $110-$120 this year leaves a lot of upside. You’ve heard much of this before.
The most comfortable stocks to own are those with an above-average yield and the prospect — almost a certainty for most — of dividend hikes. The need for income along with growth potential will drive stocks even higher this year, likely much higher than many believe until the Fed begins to end its market-boosting purchases and accommodation. Bottom line: There are better days ahead.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.