Sometimes, I’m a little embarrassed for my fellow financial writers.
Here’s a line I just read in a widely distributed MarketWatch article:
“… I have been saying that we are headed into this ongoing bubble-blowing bull market for the past three years.”
I’m not going to name names here, as it’s not nice to pick on the less fortunate…
But I do have to say that if you’ve been saying the stock market is a bubble for three years, and the market continues to trade at a reasonable price-to-earnings ratio, and those earnings continue to grow…
Well, it’s not a bubble.
That’s like saying there was a housing bubble in 2004, when the Dow was bouncing off of 10,000. Sure, maybe the conditions were there — but you also would have missed 4,000 points of upside.
Now, I get that it’s popular to say it’s all going to fall apart. For whatever reason, people love to hear that the stock market is going to crash, the U.S. dollar is going to collapse, and Americans will soon be speaking Chinese.
And people like Nouriel Roubini, Peter Schiff, Niall Ferguson, and Marc Faber have made a lot of money selling their doom and gloom forecasts.
I can’t say if they genuinely believe the world is going to hell in a bucket. I suspect these guys are using the age-old adage for news: If it bleeds, it leads.
Personally, I can’t do it like that. I’d rather take an objective look at the factors that drive long-term stock prices, and make a rational decision about what’s ahead.
2013: End-of-Year Targets
Is it too early to give my forecast for the rest of this year and 2014?
I hope not, because that’s what I’m planning. And my forecast is going to come in two articles. There’s just too much cover for one.
Now, to set the stage…
The Wall Street Journal tells us the price-to-earnings multiple for the S& P 500 is 18.3. This time last year, the P/E was 17. Since 1988, the average has been 18.6, according to Bloomberg.
In 2012, S&P 500 companies earned just over $102 a share. And as we came into 2013, analysts were generally expecting to see earnings to grow 11% to the $113/share range.
Now, when you’re looking a year out, estimates are almost always wrong. Clearly, expectations that earnings would grow 11% year over year were pretty optimistic. And sure enough, in late summer 2013, estimates for S&P 500 earnings fell as low as $105 per share.
But just recently, 2013 earnings have been getting upside revisions…
Barclays analysts raised their full-year 2013 forecast for S&P 500 earnings per share to $108 a share. Raymond James strategist Jeff Saut is in at $107.58; others run as high as $109.
In that $107-$109 range, the S&P 500 will trade with a P/E of 17.
But here’s the thing: If the S&P 500 finishes this year at its historical average, we will see a 9% rally between now and December 31.
That would mean a 157-point run to 1910 over the next two months. A similar move would push the Dow Industrials up 1,300 points to 16,840.
2013 has the potential to be a 33% upside year for the S&P 500… 33% higher, and it would still be tough to call stocks a bubble, as the valuation would not be extreme.
(The next best upside in recent memory would be 2003, when the index rallied 27%.)
Here Comes Santa Claus
I was in Home Depot the other night, and I can confirm that Christmas decorations are up. I know, it’s pretty ridiculous… but let’s not forget that consumer spending is the lifeblood of the U.S. economy.
And if you want to know how we achieve a monster year-end rally, you have to look at retail sales.
Last year wasn’t that great. Retail sales were up 3% from 2011, reaching $579.8 billion.
This year, the National Retail Federation (NRF) is calling for 3.5% to 4% growth, to ~$603 billion (excluding online sales). Not bad. But like I always say, never underestimate the American consumer…
Only in the worst of times will Americans spend less than we expect. Otherwise, we spend more. That’s the way we are, and I don’t apologize for it.
I’ve come across a few surveys that suggest retail sales could end up a lot higher than 2.5%-4%. And I think it’s likely. More people have jobs. And the wealth effect (home prices, stock prices, etc.) should be kicking in a little better this year as well.
As for 2014, S&P 500 earnings are expected to hit $121 a share. That could give us a target of 2,177 on the S&P 500.
Of course, a lot can happen between now and then (some of it might even be good!). I expect GDP growth to accelerate sharply next year, and there should be upside to the index target.
One thing seems certain: The path higher through the end of 2013 seems clear.
I sure hope you are holding some quality stocks, because you’re gonna make some money — potentially a lot of money…
I run the most conservative portfolio here at Angel Publishing. And I’ve got the second best gains, at a very solid 34.5%.
It’s called The Wealth Advisory, and it’s focused on income and dividend investments. I’ve shared some of my top choices with you, like Ford (NYSE: F) and Bank of America (NYSE: BAC), in these pages.
Next week, I will get into some specific forecasts for gold, oil, emerging markets, and the specific sectors you should be focusing your investments on.
And so you know, I’m pretty bullish on the gold miners right now. They’ve been oversold and are due for a good bounce.
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
