Stock Market Headed Higher? ... Over the Long Term, Certainly ... Over the Short Term, Nobody Knows

Merrill Lynch forecasts that stocks will pause during the next several weeks before resuming gains over the medium and longer term.

The firm opines that the market may pause now after having such a strong start to the year. And who can argue with that? Not I.

Stated another way, they aren't really saying anything, since that's generally how stocks behave, both after a strong increase and over the medium and longer terms as well.

U.S. stocks pause but headed high, says Merrill Lynch makes its perfectly safe non-prediction in this manner:

"After recent gains, U.S. stocks have stalled a bit lately, with investors reluctant to push the advance further.

Bank of America Merrill Lynch equity strategists recently suggested a cautious stance on U.S. shares for the next three to six weeks, even as they upgraded their “core view” on U.S. stocks from neutral to bullish over the next three to six months.

Investor sentiment is at a very positive level, the strategists said, though they are wary about the short-term prospects.

Reflationary central-bank policies have boosted sentiment substantially, they said, but such policies haven’t yet made much of an impact on economic activity.

“The second quarter [of 2013] is likely to be the ‘show me’ quarter this year, where policy makers must prove that they can actually stimulate the economy,” the strategists said. “If successful, then expect a negative reaction from rates and liquidity. If unsuccessful, then earnings-per-share expectations are likely to reverse.”

Broadly, they like stocks compared to other asset classes, saying they still offer the most attractive returns.

However, they are not expecting a repeat of the outsized stock-market gains seen in recent months, in part because of fiscal austerity measures in the U.S.

“The best outcome for equities is to grind higher in coming months,” the strategists said.

Still, they said U.S. stocks are well placed to benefit in the medium term, given an expected stronger performance from the U.S. economy and corporate earnings compared to other regions."

Summing Up

And over time 'grind higher' stocks will.

As a point of reference, in 1980 both gold (per ounce) and stocks (Dow Jones Industrial Average) sold for $800.  Today gold sells for ~$1600 and the Dow is closing in on $14,000.

In addition, and unlike gold, cash dividends received from owning those same stocks over the 30 plus years have far exceeded the original investment cost of $800.

So for long term investors, Merrill Lynch is undoubtedly right when it expects that stocks will offer the 'most attractive returns.' They always have and always will in a risk based free market economy like ours.

But Merrill Lynch may or may not be right about what will happen over the next several months. In that regard, nobody knows what will happen in the short term. Nobody ever knows that.

But it's the long term that should matter to individual stock investors.

For us oldsters, however, it may be time to consider a shorter time horizon. We'll cover that in a future post.

Thanks. Bob.