5 Reasons Stocks Will Make New Highs IF...

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The 4 year bull market rally is not over. So stay long stocks.

(The end).

OK. I realize that some of you may need more proof than that given all the recent hub-bub over the future tapering of QE. So let's tackle that false bogeyman first and then I will provide you with 5 more concrete reasons why stocks will continue to press to new highs.


The Reality of QE Tapering

This move is as obvious as the nose on my face. (Yes, I have a big nose ;-)

This is the most transparent Fed in history and they have been very clear that QE cannot stay around forever. They have also been abundantly clear that there are 2 things that will bring about the end of QE.

First, QE creates too much negative side effects like speculative bubbles or painful inflation. Neither is the case now. Second, they will unwind it when the economy no longer needs all the extra help.

This last part is the most important. When they start removing QE, it is likely a sign that the Fed strongly believes that economic growth is self-sustaining. Investors should see that as a Seal of Approval and not a badge of dishonor. Because in general solid economic growth fuels earnings growth, which begets higher share prices.

So enough talk about the end of QE being a problem for stocks. Now let's discuss the other 5 reasons that the bull rally is intact with higher highs on the way.


1) GDP is A-OK

The economy continues to show Muddle Through Growth averaging +2%. Yes, this is a shade light versus the historic average of +2.7% for the US economy. But it also is at a pace that is not creating excesses that often lead to the next contraction.

So whereas the average economic expansion lasts just about 5 years, this one could be longer than normal because it is like the tortoise beating the hare...where slow and steady wins the race.


2) Record Corporate Earnings

Earnings continue to grow, and that is certainly a feather in the stock market's cap. The S&P 500 is on pace to produce record earnings of $109 this year. And next year's estimates point to a new record at $121.

Honestly, I think that estimate is a bit rich as there is not enough revenue growth to generate another year of double digit profit gains. However, $115 is a reasonable outcome. As you will see in the next point, that is very good news for investors.

More . . .

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3) Stocks Are Cheap

There are many ways to access value. But one of best time tested methods is reviewing the earnings yield of stocks versus Treasury bonds.

Traditionally there is a 3% spread between the 10 year Treasury and the earnings yield of the stock market. Right now the 10 year is only at 2.1%. However, I suspect that as QE melts away the rate will float up to more like 3%.

So that would mean that stocks should have a 6% earnings yield, which translates into PE of 16.7 as fair value. Now multiply that by the $115 per share estimate I gave you for next year = 1920 fair value for the S&P 500.

I am not saying it is worth that today. I am saying that is a reasonable target for next year given the likely inputs on earnings and bond rates. Even modestly higher rates or lower earnings would still produce a fair value above current levels.


4) Stocks are the Best Investment Alternative

When bond rates start to go up they will still be low and not attractive for the yield alone. Even worse, the value of bonds will decrease as the rates move higher. As investors see their bond funds drop in value for the first time in 30+ years, they will rotate more money towards stocks.

Also as Treasury rates move higher, so too will mortgage rates. This will make the cost of housing more expensive. And put a damper on real estate investments.

With no real inflation to speak of, then gold and silver will have no luster. And cash will still be trash.

Add it all up and stocks will still be the 'Belle of the Investment Ball'.


5) Tons of Cash on the Sidelines

Survey after survey shows that the average individual investor has been scared out of the stock market given the precipitous drop after the Financial Crisis. Then toss in the tremendous volatility the past few years and you can understand why they've been saying 'No Thanks!' to stocks for a while. But given human nature they won't stay away for long.

With all the other investment alternatives looking so unattractive, there will be a natural pull back towards stock ownership. Plus as the market makes new highs once again, the media will start making a big deal leading more folks to get on the bandwagon. As they pile back into stocks, it will fuel the rally higher, which will pull even more investors back into the market.


What to Do Next?

I realize it sounds like you can just buy any stock and you will profit from this future rally. Certainly the rising tide usually lifts all boats...but some boats do a lot better than others.

First, you need to focus on companies exceeding earnings expectations each quarter, which leads to higher estimates from analysts. This in turn leads to higher investor interest and a higher share price.

Second, keep an eye on valuations. Yes, I noted earlier that the overall market was reasonably priced. However many groups, especially large caps and safety-oriented stocks, are overpriced right now. So only select those stocks that are trading at discounts to peers.

These are exactly the kind of stocks that I focus on in my personal trading account and share with the members of the Reitmeister Trading Alert Service.

Yes, I put my money right alongside yours so we are in the same boat together. (I really have a problem with those in this industry who give recommendations and don't put their own money at stake. I will never understand that).

So if you are interested in seeing the current 10 positions in my portfolio along with the future trades I make, then be sure to click the link below since this portfolio will be closed again Sunday June 9th at 11:59 PM.

About Reitmeister Trading Alert Service. Wishing you great financial success,

Steve

Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks.com and all of its leading products for individual investors. He is also the Editor of the Reitmeister Trading Alert Service.

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