Why Stocks Could Keep Going Higher In 2014
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I have finally come around to the view that the path of least resistance for stocks is higher.
The first and most important reason is that the Fed and global central banks remain highly accommodative. The much feared Fed taper finally occurred two weeks ago – and stocks rocketed higher! One reason could be that despite the taper the Fed will continue to buy $75 bil securities a month or $900 bil/year.
Second, earnings are strong and corporations are in excellent financial condition. Consider Allergan (AGN), a stock I recently looked at, for example. Allergan is best known for Botox, Restasis and breast implants but the biggest part of their business is eye care products. The company is growing the top line around 10% and the bottom line around 15%. They have $3 bil in cash and short term investments on their balance sheet. As long as the economy doesn’t experience any significant shocks, Allergan should continue to churn out solid results.
Third, the technicals are extremely strong and sentiment is becoming increasingly bullish. Investors are becoming more and more comfortable and confident in stocks and that should add fuel to the fire in the early part of next year.
I do, however, have a number of concerns. The first is the length and maturity of the current bull market. As I wrote in early November (“Bull Markets Don’t Last Forever”), at 5 years old we are approaching the time when all but the most vigorous bull markets tend to exhaust themselves. The good times won’t last forever and we should be prepared to turn more cautious when the time is right.
Second, valuations are expensive in my opinion. Many people say the overall market is not expensive at 15 or 16 times earnings. But that is based on optimistic forward earnings estimates. Those multiples are based on forecasts, not real earnings. Using trailing earnings, the multiple on the S&P is approaching 20. For example, Allergan’s trailing P/E multiple is 24.
Weighing it all together, I do think we will continue to see gains in the first half of 2014. S&P 2000 is a reasonable target.
However, that doesn’t mean I think you should run out and buy stocks first thing Monday. We have had an excellent run this month and stocks are overextended in the short term. A January correction would be a nice opportunity to pick up positions for what could be a strong final leg higher in an epic bull market.
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
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