Despite the recent volatility and scary roller-coaster ride the stock market has taken investors on, there are still reasons to believe an “epic” rally is on the horizon.
“The S&P 500 is now more than 200% higher than at its crisis-induced 2009 lows. Despite the powerful recovery in stocks, the rally has had few believers,”
Forbes.com Contributor Bryan Rich writes.
He described four reasons why investors should buckle up for a rocket ride on stocks:
- With the tail-winds of central bank influence to continue. “The truth is, global central banks are in control. They have been coordinating since 2009 to save the worldwide economy from an apocalyptic spiral,” Rich wrote. “They had to create incentives for people to take risk again. It has worked!”
- History. “If we applied the long-run annualized return for stocks (8%) to the pre-crisis highs of 1,576 on the S&P 500, we get 3,150 by the end of next year, when the Fed is expected to begin the slow process toward normalizing rates. That’s nearly 52% higher than current levels. Below you can see the table of the S&P 500, projecting this “normal” growth rate to stocks,” Rich writes.
- Valuation. “The P/E on next year’s S&P 500 earnings estimate is just 16.2, in line with the long-term average (16). But we are not just in a low-interest-rate environment, we are in the mother of all low-interest-rate environments (ZERO). With that, when the 10-year yield runs on the low side, historically, the P/E on the S&P 500 runs closer to 20, if not north of it. If we multiply next year’s consensus earnings estimate for the S&P 500 of $126.77 by 20 (where stocks to be valued in low rate environments), we get 2,535 for the S&P 500 by next year — 23% higher,” Rich says.
- Recession Risk. “For those who argue the economy is fragile, the bond market disagrees with you. The yield curve may be the best predictor of recessions historically. Yield curve inversions (where short rates move above longer-term rates) have preceded each of the last seven recessions,” he said, adding Cleveland Fed data show the current recession risk at 3.66% — virtually nil.
And other experts claim that just maybe, all this talk about bear markets is wrong.
"Anything is possible, but more than likely we are witnessing a replay of 2011 rather than 1987," says economist and author Mark Skousen.
"In 2011, the market was relatively flat. It fell sharply during the summer due to global credit anxieties but then rallied in the fall. Certainly the Fed’s zero-interest-rate policy and its rapid expansion of the money supply suggest a Santa Claus rally more than a collapse,"
Skousen writes on townhall.com.
"Today, we enjoy rock-bottom interest rates, negligible inflation, an improving economy, rebounding home prices, a strong dollar and sharply lower energy prices," wrote Skousen, Contributing Editor for the Franklin Prosperity Report, which is published by Newsmax.
"What has happened in the past three weeks? The Dow is roughly 1,000 points higher. It just goes to show you that “bears make headlines, bulls make money.”
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