History says there is still room to run
Despite decidedly negative world events and lackluster economic data, the broad U.S. indices all posted solid, though unspectacular, numbers through August.
The SPY and Nasdaq Composite are both on track for solidly double-digit total returns while the DJIA and Barron’s 400 still have a fighting chance at 10% or better if an end-of-the-year rally materializes.
Has 2014’s rise sent the averages into crazy-high territory? Not really. Improved EPS and increased dividends show only minor changes in the P/E ratios and yields versus 52-weeks ago. The DJIA’s multiple, at 15.2x, is just 1.9% above its year ago level. The SPY’s P/E has expanded by 6.6% but remains far off a nosebleed valuation.
Yields on the DJIA and SPY have dipped somewhat due to share price appreciation but now run 2.19% and 2.00% respectively. Both far exceed what is available on an short-term cash instruments.
Insider transactions also signal normalized times rather than flashing warning signals. The Thomson Reuters Sell-Buy indicator was in bullish territory until a week ago and is now at the low end of neutral, even with the market at record levels.
Many bears think the duration of the 2001 day current bull market, as of Sep. 1, 2014, means it has to end soon. They must be forgetting that three of the previous four best runups lasted from 2,931 to 4,554 days.
The cumulative percentage gain from March 9, 2009, is impressive but it’s not even close to the 250% – 497% gains posted in the four other previous ‘best’ positive stretches.
Psychology favors further gains. August’s early selloff showed the opposite of euphoria as mutual fund investors yanked out $18.5 billion just in the week ended Aug. 6. That doesn’t happen when greed is running rampant.
Economic "doom and gloomers" who are still waiiting for good news have been unable to buy stocks since 2008. They’ve suffered mightily while jealously watching their "stupid" friends make huge gains.
Precious metal advocates felt fine when gold broke through $1,900 about three years ago. Since then gold is down over 32%, producing no income, while the market has surged relentlessly higher.
Portfolio managers that were short have been anhililated. Market timers have badly lagged buy-and-hold (remember those?) dinosaurs. Cash-rich underperforming funds are praying for a huge decline and the chance to catch up with managers that were brave/smart enough to stay invested.
Many under-invested funds would need a 30% - 50% drop just to get back to where they should have been putting cash to work.
We live in a world where central banks have ruled that “cash is trash.” You will be better off to stop fighting that fact while arguing about what should be happening.
We must all deal with the world as it is. Money printing will continue until the world as we know it collapses. Until then, you’re better off in stocks than any other liquid asset.
Enjoy the ride.