4 Big Reasons to Be Bullish

The price of the S&P 500 has doubled in the past four years.

Surely then, investors say, this must be the top.

It’s all downhill from here, the doom-mongers warn. Put on your crash helmets!

But before you bet your cash on the S&P 500 folding its wings and dive-bombing into the abyss, let me give you four reasons why stocks can not only go higher, but much higher.

1. Stocks Aren’t Expensive. Sure, the prices of the major stock indices have doubled. But so have earnings.

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The S&P 500 traded at 15.32 times earnings as of Friday — below the average 19.9 reached in all prior bull markets since 1962, according to Bloomberg data.

In fact, stocks are cheaper than at any record high since 1980. Here’s a chart showing S&P 500 price and price-to-earnings …

Sure, “cheaper” doesn’t mean “cheap.” For cheap, you have to look at specific industries, like gold or natural gas or base metals. But speaking more broadly, on a price-to-earnings valuation metric, the S&P 500 is not expensive.

2. New Highs Usually Lead to an Extended Bull. Recent data from Ned Davis Research looked at the 13 new highs for the S&P 500 since its 1950s debut.

In the worst case, the S&P 500 tacked on another 2.3% over 132 days before peaking. In the best case, the bulls marched ahead for around 7.5 more years — 2,711 days, to be exact — and added another 221.6%.

The median since 1954 is 417 days and 18% upside. On average, the bull market gained 40.3% over 644 days.

Just a reminder, the difference between average and median is that you get the average by adding up all the data points and dividing by the number of data points you have. The median is the middle of the numbers.

Whichever way you want to slice it, history suggests that this bull market has a ways to go. Sure, it could be different this time. But …

3. We’re Not In a Recession. It might feel like hard times, and for many people, things are still tough. But there’s also good news. The U.S. keeps serving up positive numbers on new home sales, auto sales and manufacturing, while jobless claims are dropping.

An easy way people look at it is to use a chart showing the index of leading economic indicators from the Economic Cycle Research Institute. Here is the ECRI’s chart showing the Weekly Leading Indicators charted against GDP …

Maybe it’s not the rip-roaring growth we’d like, but we all know we’re dealing with a Congress that prefers to sit on its hands rather than stimulate the economy.

The fact is, the economy is growing despite the best efforts of some in Washington to mess things up. Why? Because we were in a long recession and demand built up, and now this pent-up demand is being unleashed.

Also, we’re in the middle of that energy boom I keep harping about — “Welcome to Saudi America!”

Stock prices are not directly dependent on economic growth. It’s more complex than that. But it’s also true that it’s easier for stock prices to go up when the economy is growing, which is happening now.

4. The Housing Market Has Bottomed. February home sales hit a three-year high, and the housing recovery is likely not even close to over.

Analyst Ivy Zelman, who was one of the few to correctly call both the top and bottom for housing, recently told CNBC that this was “the first or second inning of the fundamental recovery that could be five to 10 years in duration.”

That doesn’t mean there still aren’t problems. There remain roughly 5.3 million homes either in delinquency or in the foreclosure process. However, signs of a recovery can’t be ignored. Housing starts are making a comeback, as are sales and residential investments.

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Housing is about 15% of America’s GDP as of the third quarter of 2012, according to the Bureau of Economic Analysis (BEA). Of that total, nearly 3%, is due to residential fixed investment (RFI) — the construction of new single-family and multifamily housing units, remodeling or improvements to existing homes, and brokers’ commissions for the sale of housing.

According to a 2008 study by the National Association of Homebuilders, the estimated one-year impact of building 100 single-family homes in a typical metro area is 324 local jobs. Plus, the annual recurring impact from building those 100 single-family homes is 53 local jobs.

So, not only do you have a direct one-time impact, but housing also creates a recurring employment market. This cycle of growth is a powerful economic generator once it gets going.

I recently told my Global Resource Hunter subscribers some great ways they can ride this mega-trend. I hope you’re poised to profit from it as well.

Bottom Line: I’m Bullish

These are scary times, and there is always the possibility of a black swan event around the corner to knock the markets for a loop and send share prices tumbling. But as long as the fundamentals are bullish, those are buying opportunities.

What’s more, we have a market that remains disliked, under-owned by investors and not overpriced — at least, not by price-to-earnings metrics. With bond yields so low, there are few alternatives to equities.

Do your own due diligence, and be careful. But don’t miss those big opportunities!

All the best,

Sean

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Your thoughts on “4 Big Reasons to Be Bullish”

  1. As a bear, I appreciate the alternative perspective. Your strongest argument is that the economic fundamentals seem to be improving.

    Some of the other statements are a bit less obviously bullish. The “cheapest new highs since 1980” are not exactly a ringing endorsement, since the period 1980-1982 was really, really bad for stocks. Both eras share another common denominator – the impact of Fed policy on asset prices.

    Likewise, the “build a house” get 3.24 jobs and 0,53 permanent jobs is an interesting metric, but it assumes that that house is occupied. What you really mean is family formation. Sure, the construction workers jobs are there, but the permanent jobs are necessarily forthcoming. Ask folks in Las Vegas about the economic value of empty houses.

    Finally, saying on P/E basis that stocks are not expensive has a GREAT deal to do with which earnings you use. You do not specify. I gather you are using 1-year trailing earnings. Lots of people like to use forward earnings, operating earnings, etc. and produce all sorts of numbers.

    The most strict definition of earnings – the 10 year CAPE – show a PE of over 20. With low inflation, this is perhaps ok, but you cannot expect big gains. Risk and reward are tilted to the downside. I agree, we may see further gains over the next 12-18 months, but a sustained bull market is not likely. Prices are now simply too high, and valuations too full. A sustained bull would require significant overvaluation, and no investor should be betting on this.

  2. As long as the Fed can devalue the currency,with the majority believing inflation isn’t a problem,then real assets should increase in fiat currency.So,the bull should continue,until the headlines show more fear of inflation than unemployment.Nothing new here.

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Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit.