We have experienced a huge bull market this year but any pundits are calling for the bullish move to end in a sharp downward correction…The bears have a case, historically and cyclically, but I am going to go out on a limb and say things are really different this time. Here are 5 reasons why.
So writes David Goodboy (beta.streetauthority.com) in edited excerpts from his original article* entitled 5 Reasons This Bull Market Won’t End This Year.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here) 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. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Goodboy goes on to say in further edited, and perhaps in some places paraphrased, excerpts:
Based on my research, there will not be a sharp pullback this autumn in the U.S. stock market. The selling has already happened, and I expect upside for the rest of the year. While this upside may be lackluster, I am convinced any additional downside will be quickly bought, thus preventing any steep declines.
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Here’s why things are different this time:
1. Monetary policy will remain accommodative for some time
This year’s rally has been driven by accommodative monetary policy. Every dip like the one we experienced this month has been triggered by fears that the Federal Reserve may be changing its stance.
Fed Chairman Ben Bernanke has warned that “the premature removal of accommodation could, by slowing the economy, perversely serve to extend the period of long-term rates” [which] makes it clear the Fed will likely continue with its quantitative easing bond purchases into next year.
The recent drop in stock prices has put fear into the minds of the members of the Fed’s Federal Open Market Committee, and I expect they will err on the side of caution with their rhetoric and action until at least the end of the year.
2. P/E metrics don’t indicate an overvaluation of the S&P 500 index
Let’s look at two common metrics.
- The trailing price-to-earnings (P/E) ratio for the S&P 500 is currently 16.1, compared with a historical average of 19.3 since 1960.
- The trailing price-to-earnings/growth (or PEG) ratio has averaged 1.6 since 1960 — but now stands at 1.3.
Neither of the above metrics indicates the S&P has become overheated.
3. The technical picture remains bullish
Using the S&P 500 as a proxy for the overall technical health of the U.S. stock market reveals the bull move is far from over.
- The cash index remains over 100 points above the upward sloping 200-day simple moving average, which is at 1,560,
- The 50-day simple moving average has provided price support for 2013 and has prevented the most recent selling from becoming hazardous to the bullish case. (click to enlarge)
4. Europe has turned the corner
The European Central Bank has said it will do whatever it takes to prevent another economic crisis in the region and this has led to waves of positive sentiment sweeping the eurozone, lifting stock prices and providing clear signs that Europe’s economy has turned the corner….
We live in an economically connected world and the continuing good news from Europe can only help to support the U.S. stock market.
5. China’s showing improvement
China is the engine for the world’s economic growth and recent fears of a dramatic slowdown in the world’s second-largest economy have been greatly exaggerated. Despite slight signals of slowing, the economy remains stable and on track to hit the government’s targeted 7.5% GDP growth rate this year.
The above 5 factors combine to paint a bullish picture throughout the end of 2013. While we may not see dramatic upside, a sharp decline is also unlikely. Things really are going to be “different this time”…
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://beta.streetauthority.com/investing-basics/5-reasons-bull-market-wont-end-year-477571 (Copyright 2001-2013. StreetAuthority, LLC All Rights Reserved. Go here to subscribe to our FREE newsletter.)
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