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Stocks Are Cheap! Bull Sees Dow 10,000 By Year-End

Posted Jul 22, 2009 12:00pm EDT by Peter Gorenstein in Investing
Related: ^dji, ^GSPC, qqqq, kre, xlf, skf

Stocks are cheap -- very cheap, says Brian Wesbury, chief economist with First Trust Advisors. In fact, Wesbury says the market is trading at a 50% discount to fair market value, even after the significant rally off the March lows, which he claims was triggered by the easing of mark-to-market standards.

"Once they changed that rule all of a sudden the banks were able to raise capital [and] credit spreads started to come in.  And that's where the rally has come from," he says.

But why does he think stocks are so undervalued?

As he writes in his latest Forbes commentary: "To determine fair value for the stock market we use historical norms for the relationship between stock prices, interest rates and corporate profits. These norms suggest that with interest rates at current levels and corporate profits where they were in the first quarter of 2009, stocks today are at no more than 50% of fair value. Yes, that's right, stocks would have to roughly double from here to get to fair value.

Despite this belief, he's not expecting to reach 'fair value' in the near future.  The stock market, he says, "will remain undervalued at least for the next couple of years unless it has a monster rally."

In the meantime, which stocks are most undervalued?

Wesbury won't make specific stock picks but according to his firm's analysis, technology, and small and mid-cap regional banks offer the best value.

Go to Tech Ticker

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