My 2013 Stock Market Outlook
It?s time to put on your buying boots and throw caution to the wind. The S&P 500 (SPY) is likely to rebound as much as 9% from the recent 1,630 low to as high as 1,780 by the end of December. What?s more, stocks could add another 10%-20% in 2014. The nimble and the aggressive here will be rewarded handsomely. Those who keep their hands in their pockets will sadly watch the train leave the station without them, and shortly be exploring career options on Craigslist.
The move will be driven by the double-barreled improvement in valuation parameters, rising earnings and expanding earnings multiples. S&P 500 earnings are likely to come in this year around $107, modestly above the New Year forecasts. An improving economy could take that number as high as $117 next year.
This is encouraging underweight investors to pay up for stocks for the first time in a very long time. Today?s (SPX) 1,660 print gives you a 15.5 multiple. Boost that to 16.5 times, and the 1,780 number is served up to you like a Christmas turkey on as silver platter. Maintain that multiple, and the (SPX) grinds up to 1,930 by the end of 2014. With earning multiples smack dab in the middle of an historic 9-22 range, this is not an outrageous expectation. This is known in trading parlance as a ?win-win,? and creates a positive hockey stick effect on your P&L.
Of course, there are still many non-believers out there. Reveal yourself as a bull in the wrong quarters, and a torrent of abuse piles upon you. The taper, Syria, the debt ceiling crisis, and another sequester will demolish the economy and send stocks tumbling. There are plenty of Dow 3,000 forecasts out there. Thank you Dr. Doom.
Here?s the wakeup call: you are reading about these risks in this newsletter, and thousands more out there. None of these risks have the ability to surprise the market, as they have been so belabored by the media. They will most likely be solved fairly quickly. Everyone is planning on using these events as a buying opportunity. They are fully priced in. That?s why stocks have failed to pull back more than 7.4% since November, when the Obama reelection shock pared 10% off share prices.
What will be the short-term triggers for the next leg up? I?ll round up the most likely suspects for you.
1) Ben Bernanke?s taper of the largest quantitative easing program in history will either come in smaller than expected, or won?t show up at all. Concerns over weak jobs progress, flaccid economic growth, Syria, zero inflation, and the debt ceiling have cut the knees out from more substantial action. Here?s some quickie math. A $10 billion a month taper leave $75 billion a month on net federal bond buying in place for at least another quarter.
2) Bonds have been falling since April, taking interest rates up. Once the taper is announced, they will rally and limit moves to a new, higher 2.50%-3% range on the ten-year Treasury (TLT).
3) Syria will go away pretty soon, peacefully or otherwise. Despite the humanitarian disaster, nobody here really cares what happens on the other side of the world.
4) The debt ceiling crisis will generate headlines and sound bites for a few weeks, and then get resolved or end with a second sequester. This year?s sequester proved highly stock market positive, as it sent the government?s budget deficit plunging at the fastest rate in history, with the first serious cuts in military spending since the end of the cold war.
5) The economic data flow from Europe is modestly improving. Crises are becoming fewer and farther between.
6) The already great data from Japan is coming in even hotter than expected.
All of this makes US equities the world?s most attractive asset class. For a listing of longer term positive factors which few in the market currently appreciate, please read my early piece (?Why US Stocks Are Dirt Cheap? by clicking here).
This is not your father?s bull market. While interest rates have been moving up at the long end, they are still half of what they were at this point in past market cycles. Five years of balance sheet repair since the financial crisis mean that corporations are carrying only half the debt and leverage seen at previous market peaks.
There will also be no new tax increases for the foreseeable future. The fiscal drag on the economy, which knocked 1% off GDP growth this year, is diminishing rapidly. Remove the dead weight, and US growth could rebound to 3.5% next year.
Dividend yields are far higher, with nearly half of the S&P 500 still yielding more than the 10-year Treasury bond. Investment in stocks, particularly large caps, is safer now than it has been at any time since the Great Depression.
Another big bullish factor could be president Obama?s decision regarding Ben Bernanke?s replacement as chairman of the Federal Reserve. Naming co-chairperson, the ultra dovish Janet Yellen, could add another 20% to the (SPX), with investor expectations of ?QE forever? taking earnings multiples even higher. If mildly hawkish Larry Summers gets the nod, it might chop 10% off the index.
Which sectors will take the lead? Technology is still the area that the world wants to own. Profits are rising faster than in the main market, and they boast large amounts of cash. Look no further than Apple?s (AAPL) $150 billion wad, a third of its total capitalization. It is selling the bottom end of its historical multiple range and at a market discount. I?m not just talking Apple (AAPL), the behemoth that could make it up to $600 next year. Cloud and mobile plays will also be highly sought after.
For those with more pedestrian tastes, you can?t go wrong with plain vanilla industrials and cyclicals, which will continue to appreciate off the back of a stronger economy. Even financials should do well, given an assist from a steepening yield curve, their traditional bread and butter.
What could pee on this parade? Washington, what else? If the government shuts down and stays closed, this could give you your long awaited 10% correction, or more. The last time they threatened this, stocks gave up 25% in just two months. Will this happen? I doubt it. But no one ever went broke underestimating stupidity in our nation?s capitol.
Caveat emptor!
