Wednesday , 22 May 2024

Stocks Should Have a Record-Breaking Year According to These 7 Bullish Fundamentals

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“A sluggish economy, political gridlock,  tepid earnings, the European debt crisis,investing high gasoline prices…” I can’t really argue with Barron’s depiction of the current market  environment yet, against all these seemingly negative conditions, the stock  market keeps surging higher. Can it possibly continue, though?

So writes Louis Basenese ( in edited excerpts from his original article* entitled Seven Reasons to Expect a Record-Breaking Year for Stocks.

This article is presented compliments of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Basenese goes on to say in further edited excerpts:

Yesterday, I produced some  statistical backup, which tells us that the answer is “yes.” (In case you missed it,  you can gain enlightenment here.) Today, it’s time to focus on the  fundamentals.
Sorry, bears. They point to higher  prices ahead, too. All seven of them. Take a look:

Bullish Fundamental #1: ‘Tis the Season
As fate would have it, the Dow and  S&P 500 Index are approaching record highs at precisely the right time of  the year…[because] March and April happen to  be strongly positive months for the market. In fact, they represent “the best  two-month combo” over the last 20 and 50 years, based on Bespoke Investment  Group’s calculations. More specifically, over the last 20  years, the Dow has been up 70% of the time in March and April – for average  gains of 1.2% and 2.71%, respectively.

So, bears, I have a question for you:  “Do you feel lucky” because that’s what it’s going to take to overcome  the momentum and seasonality working in stocks’ favor right now.

Bullish Fundamental #2: It’s All About Earnings, Stupid
By now you probably cringe when I say  it but it doesn’t change the fact that stock prices ultimately follow  earnings – and they’re still going up.

In the fourth quarter, S&P 500  companies reported earnings growth of 4.2%, compared to analysts’ estimates of  2.6%, according to FactSet and for the year ahead, analysts expect  profits to grow a respectable 8.2%.

Bullish Fundamental #3: Time to Get Sentimental on You
Normally a bull market inspires  optimism on the part of individual investors but the financial crisis and  ensuing market collapse left scars – horrific scars – that are clearly preventing  individual investors from embracing stocks for any sustained period of time. Even  as prices approach near record highs. I say that because it only took a few  down days in the market for investors to abandon their optimism.

Case in point: The weekly bullish  sentiment reading from the American Association of Individual Investors (AAII)  plummeted over 13 full points last week, to 28.39. That’s the biggest weekly  decline in over two years. Ironically, plunging sentiment is a  bullish indicator for the stock market and when  bullish sentiment drops below 25% during this bull market – which has happened  seven times so far – stocks rallied over the next three and six months every  time (except once).

Long story short: Keep an eye on this  week’s sentiment reading. If it dips below 25%, we should treat it as a  reliable (contrarian) “Buy” indicator.

Bullish Fundamental #4: Underinvested, Anyone?
The time to worry about a market top is  when everyone is invested in the stock market. That is, when stocks become a  crowded trade – and that’s not even close to happening.

Consider: U.S. private pensions have  only 35% of their assets in stocks, compared to the long-term average of 45% and, as for individual investors, they’re  being told to stay underinvested, too.

The latest reading of Bank of  America’s Sell Side Consensus Indicator came in at just 45.2%, compared to a long-term  average of about 61% and an all-time low of 43.9%.

Bullish Fundamental #5: Less Joblessness = Higher Stock  Prices
We’ll save the debate over whether or  not we can trust government employment figures for another day. Today, let’s focus on the undeniable  fact that initial jobless claims exhibit a strong inverse correlation with  stock prices.

Historically, as claims dip, stocks rally (see here for pictorial  proof) and guess what – claims keep dropping.  In the last week, initial claims dropped 22,000 to 344,000. The lower they go, the higher we can  expect stocks to rise.

Bullish Fundamental #6: “Price is What You Pay. Value is  What You Get.”
Long-time investors are bound to  recognize the above quote from Warren Buffett. Well, Mr. Buffett still believes  that stocks represent a good value recently telling CNBC, “We’re buying  stocks now but not because we expect them to go up but because  we think we’re getting good value for them” and the data validates his assessment: the Dow currently trades at 12.6 times  forward earnings, compared to its median valuation of 17.2 times over the last  two decades, while, the S&P 500 trades for  14.5 times trailing earnings.

If the bull market ended now, it would  be the cheapest valuation at a market top in history, according to LPL Financial’s  Jeffrey Kleintop. In 2007, the S&P 500 peaked at 16.8  times earnings and at the end of the tech bubble, the earnings multiple  reached almost 30 times earnings.

So, yes, even though it sounds  illogical, stocks have been going up in price for four years, but haven’t  gotten expensive.

Bullish Fundamental #7: Bet on Bernanke
“Central  bankers rather than politicians are the dominant driver of asset prices,” says Bank  of America’s Chief Investment Strategist, Michael Hartnett….The Fed still holds the key to the end  of this bull market and it has no intention of letting up on the money printing  yet so, instead of fighting stock market  prosperity which is being bolstered by monetary policy, embrace it

Bottom line: Records are made to be  broken and I don’t care if the current bull market is getting a little long in  the tooth as it enters its fifth year. Given the current fundamentals, it’s  destined to keep charging and set a new record. So don’t miss out!
Ahead of the tape,

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.



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