New Record Highs — Now What?

Posted by on Nov 15, 2013

Janet Yellen’s Senate testimony helped keep the market’s momentum moving in a positive direction this past week as we saw the Dow and the S&P500 each set new all-time highs on multiple occasions – to include Friday’s close (1) – giving us six straight weeks of market gains.

Most of our earnings reports are out. Not too much on the planned economic news horizon. Commodities and bonds have given investors little or negative return this year, while the S&P is up over 20 percent. (2) And now, people are starting to get nervous about the ongoing ability of the market to do well.

One reason is for our recent move, according to Bruce Bittles, chief investment strategist at RW Baird & Co., is that “The stock market has a lot of momentum here; one reason is we’re getting closer and closer to year end, and people don’t want to take any gains because they have to pay taxes early next year.” Another is history.

According to the fine folk at S&P/Dow Jones Indices, stocks, after they’ve rallied during the first 10 months of the year, really do tend to close on a high note, as year-end tends to be an okay market most times. Over the past 25 years, the S&P has risen an average of 2.4 percent during November and December. But, in the years since 1929, when the market has already rallied over 20 percent over the first 10 months of the year, the market has risen an impressive 4.8 percent on average. That would be good.

Maybe that’s one reason why JPMorgan analyst Thomas J Lee raised his S&P 500 target to 1,825 from 1,775 this week. It closed Friday at 1797. Oh, yeah – he also said he thinks the US is in secular bull market. (That’s one that can have bearish periods within it but the prevailing trend of assets is higher.)

Bubbles? I don’t think so

This is the current buzz word the financial media is using to scare investors in the context of where we are now. This is being used to suggest that since we have hit the new highs, it’s all going to have to blow up now. My response, to call upon Colonel Porter of MASH fame, is…horse pucky.

I’m not alone is thinking this bubble stuff concern is overdone. Ron Baron, a billionaire hedge fund guy, provided this more widely ranging perspective when talking at a conference he held last Tuesday. He said: “From 1999 to now, companies earnings have about doubled. And the stock market is up 20 or 30 percent. From 2007, it’s up maybe 10 percent. People say how much it’s up, but it’s only up from where it crashed.”

As for valuations, Mr. Baron said that at the height of the Internet bubble “in 1999 the stock market was selling for 33 times earnings.” Stocks are now selling for around 14 times, he said. “They’re cheap on stock valuations alone.” Makes sense to me.

How about reasons for why we’re not moving into bubblicious territory anytime soon? Okay, here you are. As noted by Mr. Baron, market valuations are far from previous cycle tops. Stocks continue to look cheap, compared to bonds. Many investors – private and professional alike – are still underinvested in stocks. Further, there’s tons of money in cash and equivalents now so liquidity is still very much in evidence.

So, is there a big reason to sell today? No. When traders cannot come up with an argument to convince themselves to sell immediately, the market tends to drift up. Seems we may be moving to being more scared of missing the upside than getting killed on the downside.

What about earnings for next year? It’s too early to argue about that, but right now, the market is trading at 15 times earnings, with expectations of earnings growth of roughly 10 percent next year. That is not overpriced.

So, if no bubble, what next

Granted, we haven’t had a correction of 10 percent or more since 2011. That’s a long time – but we’ve had much longer times between them. Plenty of people are expecting it in 2014 – and others have been looking for one since the start of the year.

The bottom line is that this has been a very powerful rally all year, and right now, especially after Janet Yellen’s testimony, there is no reason to change that. For instance, she was quoted as saying that, “I consider it imperative that we do what we can to promote a strong recovery.” I believe that’s code for continued easing for now.

Brain Belski, chief market strategist at BMO Capital Markets said last Monday that, “From our perspective, the data simply do not support the correction talk and we remain committed to our optimistic market outlook through year-end and into 2014. As such, we believe those investors waiting to ‘buy on the dip’ are likely to be disappointed.”

He went on to say that, “Almost all bull market corrections are triggered by a Fed rate hike or a spike in oil prices and both of these conditions are nonexistent in the current environment.”

It’s my belief that investors will best serve themselves by not letting the emotion of the market cause them to make bad moves into year-end. Stay with your strategy and enjoy the long-term benefits of doing so.




(1)  CNBC, 15 Nov 2013

(2)  Ibid.

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