Why US Stocks Are Dirt Cheap
With share prices up by 20% this year, many commentators are warning of a top, a bubble, an Armageddon to come. But I think that we are just getting started.
Share prices have the rocket fuel for the Dow average to make it to 15,000 by the end of 2015, and possibly 100,000 by 2025. To understand why, you have to focus on major long-term structural changes occurring in the global economy which at this point only a handful of strategists can see.
The evidence couldn’t be more undeniable. The major stock indexes have repeatedly broken out to new all time highs in 2013. The more volatile and economically sensitive Russell 2000 small cap index has left it in the big caps dust. Inflows to equity mutual funds have been the most prolific since 2008. It all paints a picture of a run up to and (SPX) of 1,780 by year-end, which by the way, has been my own forecast all year. Perma bears be damned!
The financial press would have you believe this is all happening because Ben Bernanke changed his mind on “tapering” postponing the death sentence for his quantitative easing program until well into 2014, as if that was ever in doubt. My own theory about the extended life of ultra lax monetary easing has held up once again.
Betting on Ben?s fears of a replay of 1937, when premature tightening tipped the US economy into the second leg of the Great Depression, has been a huge winner for me for years now. It means that he is willing to err on the side of over stimulation, by a lot. With wage growth stagnant for decades, and many commodity prices and precious metals down 30% or more year-to-date, he certainly has a free pass on the inflation front to do so.
Corporate earnings are also helping, consistently surprising to the upside. None other than Morgan Stanley (MS) and Goldman Sachs (GS) have led the pack with further profit upgrades. Again, this was no surprise to me.
However, I think the market is trying to tell us infinitely more than what appeared in yesterday?s headlines. There is something deeper going on here beyond the noise of the daily data releases. Asset prices are acting like there is a major structural change underway in the world economy, which so far has remained invisible to all except the market.
Yes, there are a few professionals out there who can see imminent momentous change within their own narrow industries. But no one has yet aggregated all these changes together, so I?ll take a whack at it. Here are ten theories for you to contemplate.
This, after all, was the original plan. Health care is expensive in the US because of the lack of competition, and Obamacare delivers that in spades for the first time. Of course there were going to be teething problems. After all, the government is trying to create 50 Amazons overnight at once. It took 20 years for my former Morgan Stanley colleague, Jeff Bezos, to create just one.
You may say this sounds crazy, and you’d be right. But remember, twice in the last 25 years we have seen market multiples skyrocket to 100. Japanese share valuations reached that nosebleed summit in 1989, and American Dotcom stocks did so in 2000. And they reached those numbers with fundamentals far less substantial than we are facing now. Just take multiples on today’s market up from 15X to 20X, and the Dow should be worth 20,000.
Needless to say, all of the above is hugely positive for the stock market. It brings forecasts for a Dow 20,000 by 2015 and 100,000 by 2025 out of the realm of fantasy. It kind of makes today’s stock prices look dirt-cheap. Maybe that’s what the market is trying to tell us, if we only had the patience and the foresight to listen.
This doesn’t mean that you need to rush out and buy more stocks today. Some of these trends will take a decade or more to play out. Better entry points will no doubt present themselves this year. But the writing is on the wall for higher equity prices, not just in the US, but globally.