Smooth Sailing Ahead

For those who already don’t know my opinion, the stock market is going higher – much higher. There are no foreseeable headwinds, no storms clouds brewing. Pretty much all the economic factors that were in place when the bull market began in March 2009 are still here today – albeit with much, much higher prices, earnings and profits and only slightly higher valuations. Rates are still at zero, with no plans for them to go up anytime soon. The fed has not made any promise or official timetable to raise rates; any talk of a hike is still speculation, noise that should be ignored. The PE ratio of the S&P 500 is still around 15-17 (depending on your source), which is far from bubble territory. Eventually I can see it getting as high as 30, and if earnings multiples rise by 5% a year it could take 11 or so years for that to happen. A conservative 2% S&P 500 yearly earnings growth rate plus a 5% earnings multiple expansion shows the market possibly doubling within the next seven years.

In the chart above, I numbered all the major corrections, ending where we are today. In each of these instances there was some obvious catalyst for the market to fall. It’s not like it was arbitrary or serendipitous.

For #1, in the 90′s valuations became extremely stretched, with the S&P 500 having a PE ratio as high as 40 at the turn of the millennium. You had the technology bubble, combined with falling corporate profit margins, and very high interest rates. Despite Greenspan’s undeserved reputation as being too ‘lose’ with monetary policy, the fed made a concerted effort in the late 90′s to slow the market’s assent, raising interest rates multiple times in 1999 alone. The media disparages Greenspan by only focusing on how he alleged inflated the housing bubble by lowing rates to 1% in the early 2000′s, but the media ignores how he raised interest rates in the 90′s, possibly raising them too much, because the media can’t let facts get in the way of a well-worn narrative. According to the media, when the market crashed in 2000-02, everyone who lost money ‘deserved’ it because you had to be a greedy and irrational fool to still be in stocks. When it fall in 2008 everyone became victims, with Greenspan and the bankers being cast as the villains. Pity the poor homeowner who thought buying a six-bedroom mc mansion in the exurbs on a $40,000 income was a good idea, but those tech speculators and dotcom employees and entrepreneurs in the 90′s – they deserved to lose all their money. It’s just weird how the narrative switched.

For #2, you had the whole banking and housing problem, which the media went to great lengths to make obvious, helping to fan the flames of crisis in time for the 2008 presidential election. It was , by any definition, a crisis, but I think the media played a role in making it worse. This could be the first time in history when the media transitioned from merely reporting the market for the sake of reporting to reporting with anterior motives.

#3 was a small compared to #1 & #2, with the S&P 500 falling only 20%. It was triggered by five or so European countries (PIIGS) all at one literally being on the brink of defaulting. Yeah, not exactly a trivial matter, and definitely in the headlines everywhere. You could not have missed this unless you were ..idk..a potato farmer in Idaho with no news access.

#4? No problems, as far as I can see. We’re still in a Goldilocks economy of tame inflation and modest growth, but no deflation as evidenced by the steady rise in stocks and housing prices. No one losing sleep about defaults Europe anymore, especially as sovereign bond rates keep falling.

In summery:

-exports at record highs

-consumer spending at record highs

-inflation tame and real GDP growth steady

-S&P 500 profit margins and earnings at record highs

-interest rates still very slow, with no plans to raise them

-corporate cash balances at record highs

-booming tech sector (web 2.0, apps) providing a tailwind

-the S&P 500 has a PE of only 17-19 (depending on your source), versus 30-40 in the late 90′s. Nasdaq PE only 22, versus 100+ in late 90′s.

-the S&P 500 chart is in a 1-year consolidation pattern and due to break-out

-no sense of overoptimism or froth in regard to sentiment. Many people still skeptical, which bodes well, since markets tend to climb a wall of worry