It came down to the wire, but Washington D.C. ultimately reached a compromise on the Fiscal Cliff – albeit a less comprehensive one than originally hoped for.
Nevertheless, the resolution removes the number one uncertainty overhanging the stock market.
If you have any doubt, consider the top headline on Yahoo! Finance yesterday: “Fiscal Cliff Deal: World Markets Celebrate Certainty.”
It’s now safe to stop obsessing over the machinations in Congress – and start focusing on the outlook for stocks in the New Year.
It’s also time to break from the norm…
You see, instead of pulling together a long-winded analysis about the prospects for stocks in the New Year, I’m going to let the numbers do the talking. (Most of it, at least.)
So get ready. From the people who bring you Myth-Busting Mondays and Friday Charts, it’s time for another regular, timely, easy-to-digest investing column – The Truth By Numbers!
The Truth About the Number “3.8%”
Throughout 2012, we chronicled the tendency for stocks to rally during presidential election years.
Now that the election has passed, I bet you’re wondering how stocks perform in the first year of a president’s second term, right?
In short, not stellar.
Going back to 1900, the S&P 500 Index averages a decline of 3.8%. But don’t fret. The average might not apply in this case.
After all, history isn’t guaranteed to repeat itself. And stocks have performed particularly well under President Obama. The Dow is up almost 65% since he took office. (I’m not suggesting causation, mind you, just stating a fact.)
Only four other presidents (two Republicans and two Democrats) witnessed better stock market returns during their first terms, according to Bespoke Investment Group. If the trend is our friend – and President Obama’s – stocks look poised to climb higher still.
The Truth About “9th Place”
Since 1928, eight other bull markets have lasted longer than the current one. So despite reports to the contrary, there’s still plenty more room for this market to run.
The Truth About the Number “8.8%”
We already know that stock prices ultimately follow earnings. And analysts expect earnings for S&P 500 companies to grow by 8.8% in 2013. As they rise, so should stock prices.
The Truth About the Number “22%”
If analysts’ earnings growth projections are right, that means the S&P 500 would need to rally 22% to trade in-line with the market’s historical average price-to-earnings (P/E) ratio of 15.33.
The Truth About the Number “7%”
For argument’s sake, though, let’s assume earnings don’t grow at all in 2013. The result? Upside still remains. The S&P 500 could rally another 7% before it trades in-line with the long-term P/E ratio average.
So either way, a reversion to the historical mean for the stock market points to more profits for investors.
The Truth About the Number “2.24”
You’re not a fan of P/E ratios? Well then, consider the current price-to-book (P/B) ratio for the S&P 500. It checks in at 2.24, which is 7.4% below the long-term average. So whether you prefer to value stocks based on P/E or P/B ratios, it doesn’t matter. Both metrics point to at least another 7% upside for stocks.
The Truth About the Number “10%”
Despite the fact that stocks have been rallying for more than three years, the average pundit refuses to even refer to it as a bull market. Total nonsense. Amazingly, though, such a lack of enthusiasm is widespread.
Case in point: Bespoke’s Composite Market Sentiment Index – which takes into account the most widely tracked sentiment indices – currently rests at about 10% below the historical average since 1990.
As Bespoke concludes, “If you’re a contrarian, current sentiment towards both the market and the economy should have you gobbling up stocks like turkey on Thanksgiving!”
Preach on, Bespoke! This contrarian couldn’t agree more.
Bottom line: Strictly by the numbers, the stage is set for the most unloved and disrespected bull market in history to keep charging higher. Don’t miss out.
Ahead of the tape,