You Won’t Believe This Expert’s Prediction for the Dow
You’ll know our regular US contributor Jim Rickards often paints a bleak picture for the US stock market.
I thought we’d take the opportunity this weekend to hear the counter argument from another American voice.
It’s always important to hear both sides in any market. It’s the only way to continually stress test your knowledge, assumptions and positions.
A lot of people don’t like this. They just want to be told what to do and then blame someone else if it doesn’t work out.
That’s not you, if you’re reading The Daily Reckoning Australia. You know there’s two sides to every trade and that certainty doesn’t hold a place in any rational investment plan.
There are only probabilities.
There’s a lot of voices prepared to tell you that US markets have likely peaked. After all, US stocks have been rising since 2009.
However, there’s good evidence to suggest US stocks can keep pushing higher.
In fact, the ‘last stage’ of a bull market can actually lead to the most explosive gains.
Find out for yourself below.
Dow 50,000? Don’t Laugh
By Mike Burnick, Contributing Editor
2018 is turning out to be a year of higher volatility for global financial markets.
Consider the US’s S&P 500 Index. After quiet but steady gains in 2017, the S&P experienced more day-to-day volatility in the first four months of this year than in all of the last.
There have been some three dozen trading days already this year, with the stock index swinging plus or minus 1% in value.
That compares with just eight days in total in all of 2017 when the S&P moved 1% or more!
The same thing has been true in corporate and government bond markets, not to mention global currency markets.
The reason for elevated volatility is clear: Uncertainty. The two main factors responsible boil down to:
a) Monetary policy, and
Recent economic data shows clear signs that inflation is accelerating. That has investors nervous that the Federal Reserve may turn even more aggressive in tightening monetary policy by raising interest rates faster than expected before last week’s hike.
Recent data shows wages and salaries are rising at the fastest pace in a decade. And that’s not all. Core prices, which exclude volatile food and energy costs, are up nearly 3% over a year ago — a sharp increase. Import prices are likewise rising at the fastest clip in six years.
Add it all up and we have multiple signs that inflation is back, and that has markets on edge. Of course, import tariffs imposed by the Trump administration, with threats of a full-blown trade war, are also adding to market instability.
But in this sea of market volatility, several profitable trends have emerged.
First, commodities have been outperforming both stocks and bonds over the past several months, and I believe that’s a trend that will continue longer term.
For several years now, paper assets (stocks and bonds) have outperformed hard assets (commodities) by a wide margin.
Never forget that markets are cyclical. What goes up must eventually come down again. And we’re just at the beginning of a major shift in trend back in favour of hard assets, including commodity-producing stocks.
Second, drilling deeper into the natural resource sector, it’s clear that energy stocks are leading the pack in terms of performance.
The good news is that energy stocks may still have a long way to go on the upside in spite of the strong recent performance. That’s because the oil and gas sector is still more than 50% off its highs from 2014!
Third, Treasury bond prices have been getting hammered recently and it’s no surprise why. Stronger-than-expected inflation, as noted above, is toxic news for long-term Treasury bond prices, plain and simple.
Meanwhile, we’ve seen plenty of volatile trading as stocks rode a roller coaster of market-moving news.
The big events last week were Wednesday’s Fed meeting and renewed trade tensions with China, which spilled over into this week.
Let’s step back for a minute and look at the bigger picture
Beneath the roiling surface, stocks look a lot healthier than the headlines would suggest.
For instance, the NASDAQ 100 Index just notched a fresh all-time record high in spite of the volatility, propelled by the technology sector, which is delivering strong profit growth.
Also, the Russell 2000 Index of small-cap shares keeps hitting one record high after another, including a recent all-time high over 1,700.
So, while volatility may persist during the Northern hemisphere summer doldrums, the underlying strength of the stock market still looks bullish.
In fact, this could be just the start of a parabolic move higher for stocks.
You see, massive money flows are moving into the US — thanks to higher interest rates here than in any other part of the developed world, not to mention political turmoil overseas.
So — how much higher can stocks go from here? After all, the Dow has already travelled from under 6,500 in 2009 to 25,000 today — a gain of nearly 300%!
The Dow could potentially reach 50,000 over the next five years,
but do you believe it?
It’s not such a stretch to think so. After all, that would ‘only’ be about a double from here. And remember, late-stage bull markets often save the best for last.
In fact, history shows that previous bull markets posted their biggest gains in the last one to two years, with the S&P 500 climbing an average of nearly 60% over the last 24 months of a bull market, as you can see in the graph below.
And in 1998 and 1999, the NASDAQ surged over 200% higher before that bull market ended. History may be repeating now, so don’t rule out a market move of similar magnitude, or even better, this time around.
This kind of big, parabolic surge in stocks has been talked about by several financial forecasters, most recently Kevin Matras, Vice President of Zacks Investment Research.
He predicts the S&P 500 could double from 2,780 today to 5,500-plus over the next five years or less. If so, the Dow moving from 25,300 now to over 50,000 is certainly doable. Interestingly, this forecast is backed up by another research report.
Analysts at Merrill Lynch compare the current bull market to previous secular bull markets in the 1950s and 60s and from 1980–2000, and they believe the S&P could reach 5,000 — roughly equivalent to Dow 50,000 — by 2022 or 2023.
That would require average gains of about 15% a year, which isn’t far-fetched at all, because it roughly matches the yearly performance of the S&P 500 since 2009.
The S&P 500 has rallied more than 30% over the last 12 months alone
Also, the stock market’s gains over the past nine years were achieved with the US economy growing just 1.5% per year. What happens if the economy suddenly accelerates from here?
That scenario is already playing out today, driven by tax reform and inflation, which at least initially are big pluses for profits because they give businesses pricing power.
Just look at the evidence: Corporate earnings just soared 28% in the first quarter — the strongest profit growth rate in eight years. And earnings are on track to jump another 20% in the current quarter. The unemployment rate just fell to an 18-year low of just 3.8%.
According to the Atlanta Federal Reserve’s GDPNow forecast, current-quarter growth could top 4.8% for the three months ending June and that would be a huge positive surprise, because economists are expecting only 3% growth!
It’s no wonder that my system is turning more bullish on US stocks and sectors. In fact, US small caps, real estate and technology — not to mention commodity-related sectors like energy and metals — are all getting close to potential new buy signals.
For The Daily Reckoning Australia
Publisher’s Note: Mike Burnick is a 25-year investing veteran. He’s an American Registered Investment Adviser and portfolio manager. He’s a frequent guest commentator on CNBC, Fox Business News, Bloomberg TV, and nationally syndicated financial talk radio programs.