It is getting harder to forecast the direction of the stock market.\u00a0 A year ago there were still plenty of bears around and we expected the market to rise as cautious strategists, one by one, threw in the towel.\u00a0 Investors were pulled into a rising market, producing the \u201cvaluation levitation\u201d we expected.\u00a0 Now confusion and disagreement have dissipated and there is a rather alarming unanimity that stocks are headed higher in 2014\u2014even though the S&P 500 is already<\/b> 7% above where strategists, as of four months ago,\u00a0expected to end this year.\u00a0 Although the consensus is not always wrong, the risks of a stock market correction is higher, now that there are far fewer bears to convert.<\/p>\n
Rising optimism is apparent in the latest Barron\u2019s<\/b> survey of 10 Wall Street strategists (to which I added the views of 2 other houses).\u00a0 The strategists have become more bullish since September and are in close agreement as to what 2014 will bring:<\/p>\n What should we conclude from strategists\u2019 unanimous bullishness on the overall market?<\/p>\n Complacency has increased, and investors are carrying huge profits, so the market is vulnerable to bad news\u2014particularly any evidence that the Fed won\u2019t be as accommodative as expected.\u00a0 You don\u2019t need a really good reason for stocks to trade down 15%.<\/b>\u00a0 Keep some powder dry.<\/p>\n That said, my guess is that strategists are not yet bullish enough<\/b>.\u00a0 We could well end 2014 above their average target of 1969<\/b>. The dominant financial reality is that investors earn nothing on CDs and money market funds, and they earn very little from bonds, despite the price risk.\u00a0 With short rates unlikely to rise meaningfully before 2016, investors will continue to reach for yield in the stock market <\/b>while companies, responding to shareholders\u2019 wishes, raise dividends faster than earnings. (3M just raised its payout 35%!)\u00a0 Therefore I think the S&P 500 yield will remain 2%, and with dividends likely to be $41-$42 next year that implies a 2014 year-end price of 2050-2100.\u00a0 If profits are $120 the\u00a0 trailing PE would be 17.3x which is high but not ridiculous.\u00a0 It is only modestly above the current 16.6x, and of the 12 strategists, 4 have year-end 2014 trailing PE forecasts of 17.1x or higher.\u00a0 The economic pick-up in the U.S. and parts of Europe is positive for earnings; though I don\u2019t expect a huge upside surprise, positive profit news is bullish for sentiment.\u00a0 And don\u2019t forget politics<\/b>.\u00a0 The Obamacare news will only get worse next year as millions of small business employees lose their plans and their doctors and are forced into inferior plans with higher premiums and deductibles.\u00a0 A big Republican win next November would be unambiguously bullish for stocks.<\/p>\n Copyright Thomas Doerflinger 2013.\u00a0 All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":" It is getting harder to forecast the direction of the stock market.\u00a0 A year ago there were still plenty of bears around and we expected the market to rise as cautious strategists, one by one, threw in the towel.\u00a0 Investors … Continue reading \n