Seven Reasons to Stay Bullish on Stocks

by Alexander Green, Investment U Chief Investment Strategist
Friday, July 27, 2012
Alexander Green

At an investment conference at the St. Regis in Deer Valley, Utah last week, I heard a number of investors express skepticism about the latest surge in the stock market.

“It’s not going to last,” said one. “There are just too many headwinds.”

“It’s a bear market rally,” offered another.

Perhaps not.

We’ve all heard the negatives about the economy and the stock market. After all, the national media recycles them endlessly: The economy is weak. Unemployment is high. Consumer confidence is low. Banks aren’t lending. Businesses aren’t hiring. The real estate market is swamped in a sea of foreclosures. The Eurozone is coming apart at the seams. The national election is so uncertain… and we face a “fiscal cliff” at year-end.

But there are plenty of reasons to stay bullish on stocks. Here are seven of them:

  • Inflation is low. And it may well go lower. After all, oil and natural gas are sharply lower this year – and so are the prices of many other commodities. This will increase operating margins for manufacturers and purchasing power for consumers.
  • Interest rates are still zero. This is unfortunate for savers, but positive for consumers and businesses because it makes it so cheap to borrow. It also makes cash awfully unattractive relative to dividend-paying stocks.
  • Huge new markets are opening up overseas. Domestic consumption is rising in Asia, Latin America and Eastern Europe. And emerging markets make up three-quarters of the world’s landmass. They also make up roughly 85% of the global population. These folks are going to need everything we in the West take for granted: homes, cars, computers, cellphones, microwaves, dishwashers, credit cards, mortgages, health insurance and so on. This will be an engine of global growth for years to come.
  • Valuations are low. Even though the market has rallied, stocks are still cheap. The companies that make up the S&P 500 are selling for just 12 times earnings. That’s much cheaper than the historical average P/E of 16.
  • Equity funds are experiencing heavy net redemptions. It sounds counterintuitive, but it’s actually a positive thing when shareholders are cashing in their stock funds. Why? Because history shows the average fund investor has horrible instincts, piling into stocks when they are most expensive (as they were, for instance, during the internet bubble 12 years ago) and bailing out when they’re cheapest (as they were at the market bottom three and a half years ago). Take some consolation from the fact that they’ve been cashing out in droves this year.
  • Stocks yield more than bonds, a historical anomaly. In the first half of the twentieth century, if you had done nothing more than buy stocks when they yielded more than bonds and sold them when they yielded less, you would have timed the market perfectly. Unfortunately, this technique stopped working in 1958. That was the last time that stocks yielded more than bonds… until the past year. With bond yields at all-time lows, stocks now yield more. And if history is any guide, that makes now a good time to buy them.
  • Corporate profits are at all-time record levels. This surprises many investors, but it’s true. In fact, it’s been true for each of the past nine quarters. If you want to know why the stock market has kept pushing higher through all the gloom and doom, it’s because of this: Share prices follow earnings. And earnings – despite all the naysaying – have never been better.

Stock market investors have a strong tendency to think emotionally rather than rationally – and then regret it in the luxury of hindsight.

In the end, of course, markets make opinions, not analysts. So judge for yourself. Above is a three-and-a-half-year chart of the S&P 500. Does that look like a bear market to you?

Good Investing,

Alex

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