Topic: The case for a 25% upside for stocks in the coming 6 months
Style: ironic, humorous, short
1 The trend is your friend
I mean, what are the odds of this trend suddenly reversing?
Some say it’s just getting started.
Remember that stocks went nowhere between 1996 and 2009, and 2000 and 2012 or was it 2013? That’s a long time going nowhere so it’s about time we had a rally, no?
2 Stocks are cheap
We’re not even at a recent bottom in PE ratio, let alone an ocular average PE for the recent history. With zero interest rates, massive stimulus, not to mention the internet and general automation boosting productivity, PE-ratios should be well above average, right?
3 Profits are going up
Not that fundamentals are that important, except over very long time periods, but the trend for profits is up. In addition profits have hit a temporary plateau while they wait for the most recent monetary stimulus to translate into higher profits.
With both higher earnings multiples and higher earnings in the cards, a 25% immediate increase in S&P 500 is actually a quite modest expectation
4 Interest rates are low
This chart speaks for itself, I hope. With interest rates this low, there is no alternative to stocks. Retirees can’t live off of a 2.2% return. Nominal!
True inflation eats up all of that if not more, not least since housing costs are rising. And… look at the chart, can you honestly say you don’t think rates are going lower?
5. Dividend yields are real, and they are at a low point in history and thus likely to rise
OK, admittedly the DIV yield is lower than the interest rate, but rates are fixed and nominal, whereas dividends increase with the economy (if not faster owing to the superior selection of stocks in the top index).
By the way, with rising profits, either dividend yields will increase or stocks will rise. And then there is the potential of multiple expansion as well! Please note that DIV yields are abnormally low. Hence, they are likely to rise.
There are of course numerous more reasons to expect higher profits and share prices, such as increasing automation (robots are way cheaper than humans), solar energy (once expensive oil is out of the way, profit margins can expand), profit margins are at historical highs, digital companies like Alphabet, Netflix, Facebook, Amazon etc are not burdened by production costs, 18tn USD of newly minted money globally over the last few years, the 5tn Chinese One Belt One Road initiative, a permanent shift higher in valuation multiples as we now realize stocks are the superior investment alternative… The list goes on and on.
No matter, in the next post, that I urge you to read in conjunction with the one you have before you, I’ll go through a few highly speculative and hypothetical challenges to the upside case. We’ll talk demographics, pensions, debt, currencies, consumption, inflation, and maybe even throw in some debt ceiling and foreign tax repatriation arguments for good measure.
Could there actually be an alternative to being all in on the stock market? Isn’t diversification a four letter word? Stay tuned to find out. Subscribe, read my book, check in again, tell a friend.