Why the Stock Market Could Continue to Rise

Why the Stock Market Could Continue to Rise

Because of its torrid pace over the past 17 months, many investors are starting to point to indicators that predict that the stock markets may be nearing a peak. First, corporate insiders have become net sellers of stocks. According to the Vickers Weekly Insider Report, for the week ended February 1, 2013, corporate insiders of companies listed on the NYSE sold 9.20 shares for every share that they bought.*  Second, the amount of margin debt – the money borrowed to buy securities on the NYSE – is at a 5-year high. The last time it reached this high was in February 2008. Finally, money is starting to flow into equity-focused investment vehicles for the first time since 2007. During this time period, fixed-income investment vehicles saw record inflows. Yet, there are reasons to believe that the stock market could continue to climb higher.

  • On February 13, 2012, Barron’s released a cover story entitled “Enter the Bull” on Professor Jeremy Siegel’s prediction that the Dow would likely hit 15,000 by the end of 2013 and could even break through 17,000, a 34 percent gain from the level at which the Dow was at on that date. Siegel, who wrote the best-selling book Stocks for the Long Run, based his analysis on past stock market cycles and the current market’s valuation. Siegel later wrote: “…when stock returns for the preceding five years fall in the bottom 25% of all five-year returns, as did the returns from 2007 through 2011, the annualized return on stocks in the following two-year period is 20%—more than double the market’s long-term return of 9.9% annualized. Moreover, the market achieves annual gains of 10% or more about 70% of the time.”**
  • Although the current Price-to-Earnings ratio of approximately 17 is close to the S&P 500’s average P/E since 1935, the average P/E of the S&P 500 is 23.6 when the yield on the 10-year Treasury bond is 6.7 or less (the yield is 2.04 percent on February 14, 2013).***
  • The S&P 500 is not overvalued relative to its earnings compared to prior periods. In fact the earnings multiple in 2000 was double the current multiple. This means that stocks still could rise and not be overvalued in comparison. The average bull market – defined as a market that has risen at least 20 percent – has generated a gain of 160 percent and lasted 56 months. The largest, from 1990 to 2000, lasted 113 months and increased 417 percent. The current bull market has risen 122 percent and has lasted 47 months.**** 

*Lombardi, Michael. Six Historical Reasons Why the Stock Market Is Near a Top. 13 Feb 2013. Benzinga. 13 Feb 2013. <http://www.benzinga.com/trading-ideas/technicals/13/02/3330101/six-historical-reasons-why-the-stock-market-is-near-a-top.>
**Siegel, Jeremy J. The Case for Dow 17,000. 19 Nov 2012. Kiplinger. 14 Feb 2013. <
***Rates. 14 Feb 2013. The Wall Street Journal. 14 Feb 2013. <
****Zweig, Jason. It’s Hard to Limit U.S. Stock Exposure. 1 Feb 2013. The Wall Street Journal. 14 Feb 2013. <

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