1600 in Our Sights - Weekend Wisdom
No Recession on the Way The #1 cause of bear markets is a recession. In fact, the average market decline during a recession is 34%. The last one we had was much worse than that. So it's always beneficial to check the economic forecast before getting long stocks.
- Current US GDP = +3.1% in Q3. That is one of the best readings in several quarters. From this higher perch it is that much harder to knock the US economy into a recession.
- Housing is Heating Up: Economists note that typical recoveries are propelled by healthy construction numbers. Yet, that was certainly not the case the past few years. Now we see that coming into bloom, which will only bolster GDP results.
- Europe: They are already in recession and yet we still racked up a +3.1% GDP result. And signs are that they will start to emerge from their recession later in 2013. Unless they implode, then nothing to worry about here.
- China: Yes, a decelerating China is bad news for world growth. Gladly it seems that after several quarters of moderating growth, things are perking up there once again.
Stocks Are Undervalued The evidence here is overwhelming. Consider that the average stock market PE is 15. Now apply that to the $113 per share expected for the S&P 500 next year. That computes to 1695. Even if you say that those earnings projections are too high (which I agree is the case), then trimming it down to a more conservative level of $105 per share still gives us an S&P level of 1575. Now consider the landscape. The 10 year Treasury is paying a meager 1.75%. Your checking account and CDs are offering even less. Typically the earnings yield on stocks is 3% higher than the treasury rate. Meaning that stocks should be offering investors a 4.75% likely return. The earnings yield is nothing more than turning the P/E ratio on its head. So when we divide the $105 projected earnings next year by the current S&P reading of 1430, we get a 7.34% earnings yield. Even more abundant proof of the undervalued nature of stocks at this time. With all the above, I am very comfortable putting out a 2013 target of 1600 for the S&P. That is still only an earnings yield of 6.56%. So if we get towards the end of the year with GDP in healthy shape and no recession on the horizon, then we could even get a good stretch above 1600.
What to Do Next? If you have been predicting the ups and downs of the market well over the last few years, then stick with the strategies that are working for you. However, if you have a spotty track record, then likely you need some assistance in charting a course to better results. We here at Zacks have done exceptionally well at calling the market direction over the last few years. Then applying the Zacks Rank, our customers have enjoyed a steady parade of winning recommendations. Right now we have 11 outstanding portfolio recommendation services including; Whisper Trader, Home Run Investor, Options Trader, Value Investor, my personal Reitmeister Trading Alert and more. Which of them best fits you? The best way to select the service that's right for you is to try them all. So I invite you to look into our Zacks Ultimate program, which gives you access to every one of our portfolio recommendation services, even those currently closed to new members. I have arranged for you to see all of our moves and insights for the next 30 days in a special manner. But please understand that this unique opportunity is temporary. You can only get in on it until Sunday, December 23. About Zacks Ultimate >> Best, Steve Reitmeister Steve is the Executive VP in charge of Zacks.com and all of its subscription services. His personal mission is to help investors achieve life-changing investment success by harnessing the power of earnings estimate revisions. Over the years, he has developed a full array of services to help investors do just that. Discover all of these services now to find the ones that perfectly fit your investment style. Learn more about Zacks Ultimate.