“I remember when the Dow hit 1,000, and then 2,000,” a friend in his 70s told me last month at lunch…
“Now the Dow’s near 20,000. That’s scary.”
This friend is no dummy… He founded a major corporation that traded on the stock market. He had tens of thousands of employees. His net worth hit nine figures.
And he’s scared. I get that… We’re in uncharted territory. But I have a positive message today:
Stocks can go much higher this year. And there are two major reasons why.
Let me explain them both…
First, fearing new highs simply doesn’t make sense. But I do understand why it happens.
If prices hit a new all-time high, then they only have two potential places to go… somewhere they’ve already been, or somewhere they’ve never been.
Our brains tell us stocks are more likely to fall… to a place they’ve already been before. That feels comfortable. That has already happened, at least.
Our brains are wrong. And we have decades of data to prove it…
I explained this idea in November. I urge you to read the full essay… but the simple explanation is this: Stocks tend to perform better after hitting new highs than after hitting new lows. As I said then…
We crunched the numbers. And the results were amazing. You REALLY want to own stocks after a new 12-month high… And you really DON’T want to buy stocks after a new 12-month low.
The future could be different from the past, of course. But we’re talking about 88 years of history here. So tell me… Do you think that the way stocks have behaved over the last 88 years is going to change – starting today?
Stocks have just hit new highs… And that tells me stocks could have another strong year in 2017.
The second major “bear case” for 2017 is something we’ve heard about for years…
“Stocks are too expensive. They can’t continue higher from today’s inflated prices.”
That’s what people have been saying. But think with me for a second… What’s been a major driver of stock prices in recent years? It’s ultra-low interest rates.
Investors have a choice today – between earning no interest in the bank, or taking risks in stocks.
Investors are always choosing between earning safe interest (if they can) or taking a risk in the stock market. So to understand if stocks are a good deal, you have to consider whether they’re a good deal relative to interest rates.
Said another way: you must consider both stock valuations AND interest rates when sizing up the value in stocks.
A few years back, I built an indicator that considers both of these pieces for my True Wealth readers. I call it the True Wealth Value Indicator.
This simple value measure combines a stock’s valuation – the price-to-earnings (P/E) ratio (adjusted for recessions) – with short-term interest rates.
Short-term interest rates contain a lot of information about the investing environment. Inflation is part of short-term interest rates. And so are the actions of the Federal Reserve. So our True Wealth Value Indicator tells us a lot about how to value stocks with interest rates in mind.
As you can see from the chart below, stocks were incredibly cheap at the bottom in 2009… and they were extremely expensive at the top in 2000. This indicator works.
Right now, we’re about in the middle of the range… Stock valuations are not high compared with our indicator’s history. Take a look…
Most people think stocks are expensive. But when you take today’s ultra-low interest rates into account, you see that stock prices could easily go much higher from here.
So we have two important factors in play for 2017…
1.Stocks are hitting new highs, which is good going forward, and
2. Stocks are NOT expensive relative to history when you add in interest rates.
This isn’t the story most folks are telling today. It’s easy to tell the “fear” story that folks expect to hear. But to me, we have the opportunity for another great year.
In short, more new highs are likely in the stock market in 2017.
Good investing,
Steve
Sponsored Link:
In DailyWealth Trader, we have all the tools you need to start generating big
income from selling
options, including an extensive "training center" that houses thousands of dollars'
worth of educational
material... daily Q&A sessions... and a large video archive.
You can
learn more about
DailyWealth Trader right here.
Source: Daily Wealth