Markets continue to defy the odds by reaching new highs nearly every week. Some skeptics are saying this bull market can’t last much longer.
Seth Masters is not one of those skeptics; the chief investment officer at Bernstein Global Wealth Management joined The Daily Ticker to defend his prediction that the Dow (^DJI) will break 20,000 by late 2018.
In May, Masters joined the program to explain why he thought the Dow would reach the 20k mark by 2020. Now he believes it will happen two years earlier and notes that markets could hit that important threshold by the end of 2014.
“The fundamentals underpinning the valuations of stocks today are quite strong,” he says. “The reason why we’re ahead of where we originally expected to be is because the economy approved a little more than we expected and also because P/E ratios have normalized more quickly than we thought.”
This is not just a bubble, says Masters. Comparing today's P/E ratios with stock valuations from 2000, he points out that markets are only trading at about 15 times earnings whereas 13 years ago they were trading at 25 times earnings.
“If you compare today’s markets to the peak in 2007, companies today have half as much debt relative to their balance sheet as they had then,” he says.
Bond yields are historically low which have made stocks appear cheap. Will the market rally end if bond yields increase?
“In the past it’s been pretty consistent that when yields rise...it's generally good for stocks because the reason yields are rising is that the economy is improving,” says Masters.
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