Tuesday, March 5, 2013

Dow Should Hit Record Today ... Stocks Keep Trending in an Upward Direction ... How High Is Up?

Stocks have been on a tear this year. Last year, too.

Predictions are dangerous, and especially those about the future, as my one of favorite sayings puts it. But despite the 'danger' involved, here we go anyway.

Today the Dow should hit an all-time high. Soon therafter the S&P 500 index will probably do so as well.

In fact, pretty much for the past one hundred years, excepting a few frightening and genuinely huge downdrafts, stock prices have gone higher and higher, while paying cash dividends all along the way.

So what will happen going forward? More of the same over time, I would guess.

As Mark Twain said, history doesn't repeat but it does rhyme.

Of course, our outlook should necessarily depend on our investing time-frame, but it looks good from here, assuming we have the temperament to hang in there when the market takes an occasional hit. Today's price level is. at least in my view, by no means overvalued based on earnings, cash generation, interest rates and the general economic outlook.

So long term I'm still a bull, but I always am. And short term I have no clue, but I never do. That said, regularly investing in stocks seems like a good idea to me. But if you do invest, be prepared for some big bumps along the long term road to financial security.

Stocks Testing Records --- But There's Still Room to Run has an optimistic near term outlook for stock prices:

"The market is surmounting a wall of worries to approach all-time highs. The best news: There are reasons to think the good times will continue. . . .

Behind the sharp recent gains: impressive corporate earnings, a rebounding U.S. housing market and improvements in Europe and China. Continued indications that the Federal Reserve isn't eager to raise interest rates any time soon also are helping stocks, by keeping bonds unattractive and allowing companies and individuals to borrow money at puny rates.

The climb has come despite hand wringing about a string of issues, from a political squabble that has forced cutbacks on the government to a U.S. economy dealing with lackluster growth.

Stocks remain reasonably priced, despite the market's gains since November, so investors shouldn't race for the exits, some analysts say. Stocks in the S&P 500 index trade at less than 15 times their earnings over the last year, and about 13.5 times their expected earnings over the next 12 months. Both are reasonable multiples based on historical ratios. . . .
"Stocks are fairly priced relative to traditional metrics, like earnings and revenues," says Jack Ablin, chief investment officer of BMO Private Bank. "They're cheap relative to bonds."

Meanwhile, the dividend yield of the 100 largest companies in the S&P 500 is expected to be about 2.6% this year, well above the 1.9% yield of 10-year Treasury notes. That's another reason to think stocks are more reasonably priced than bonds, a reason money has shifted to equities from bonds. . . .

While individual investors are beginning to get more excited about stocks, they're still sitting on piles of cash, suggesting more money could move into the stock market. Over the past four years, investors have plowed more than $1 trillion into bond mutual funds, while pulling $500 billion from U.S.-oriented stock funds, according to Citigroup.

"Investors may be on the cusp of a major reallocation back toward equities," argues Tobias Levkovich, Citigroup's chief U.S. equity strategist.

To be sure, the valuation picture isn't quite as rosy based on other metrics. One favored by Robert Shiller of Yale University that measures stock prices against average corporate earnings of the last decade shows stocks trading at nearly 23 times earnings, well above the historical average of 16. Some favor this measure because using a decade of profits makes it less volatile.

Bears also worry that profit margins are at record peaks and likely to fall, and that the U.S. and global economies remain fragile. Economists expect the U.S. economy to grow about 1.5% this year, a meager figure that comes on top of growth of just 0.1% in the fourth quarter of last year. Goldman Sachs predicts growth will be 2.9% next year and that investors will begin to anticipate the improvement later this year. . . .

In the bond market, there's more evidence of danger. Junk bonds and other riskier debt have been so popular, and the volume of new sales of junk bonds has been so strong that some economists and analysts have turned wary. . . .

William Gross, manager of the world's largest bond fund at Pimco, recently wrote that stock and bond valuations are becoming stretched, but not yet at levels where investors should sell the bulk of their portfolios.

"On a scale of 1-10 measuring asset price 'irrationality,' we are probably at a 6 and moving in an upward direction" he wrote.

What investors need to do, Mr. Gross argues, is to stay invested in the market, but temper their expectations about future returns.

"Recent double-digit returns are unlikely to be replicated," Mr. Gross wrote, pointing to potential annual gains of 5% to 6% over the next few years."

Summing Up

Stock prices, like interest rates, will always fluctuate. That said, over time they tend to 'fluctuate' in an upward direction.

That will continue to be the case.

Things to consider when deciding whether to put your long term money in stocks or fixed income instruments like bonds are future inflation prospects, current and future expected interest rates, maintaining purchasing power, companies' earnings prospects and the value of increasing cash dividends on stocks compared to unchanging interest rates on bonds owned.

In my view, stocks win on all counts today. And for those individuals with a long term investment instead of a trader's approach, they always do.

That's my take.

Thanks. Bob.

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