Three Reasons the S&P Could Rally to 3,000 by Year’s End
Millions of skittish investors are bracing themselves for a meltdown based on everything from the perception that stocks are richly-valued, to very real concerns about political discord, rising interest rates, and dicey international relations.
Yet, the exact opposite is far more likely to happen.
Counterintuitively, conditions are right for what could be a monster run into 2018 that takes the S&P 500 Index to 3,000 or even higher.
It’s the kind of run I love to think about and an incredible profit opportunity for those investors who know where to look and what the markets telling ’em about the possibility.
I made my case briefly Monday during an appearance on Fox Business Network’s Varney & Co. and got so many emails asking for more detail that I’ve decided to dedicate today’s column to providing just that.
Here’s why I believe the S&P 500 could rally an impressive 17% by the end of this year.
Reason #1: The Herd Is Almost Always Wrong
Historically speaking, that’s a dead giveaway and an ultra-reliable sentiment indicator that the opposite is far more likely to happen for the simple reason that the “herd” is almost always wrong.
Think back to November 1990 when bullish sentiment sat at an all-time low of 12%, according to the AAII Member Sentiment Survey. Kuwait had been invaded, Iraq wouldn’t back down, oil prices were rising, and the U.S. Economy was declining. Yet, twelve months later, the S&P had tacked on 25.2%.
Or, consider October 1990 that same year, when bearish sentiment peaked less than a month before bullishness hit its lowest point ever. Again, twelve months later, the S&P 500 had risen 25.6%.
Many investors fail to realize that excessive sentiment readings are frequently a precursor to market transitions, which are the exact opposite of the prevailing social mood at a specific point in time.
If people are overly bullish, the bears charge out for example. And, if they’re overly bearish, the bulls go on a stampede.
If you’ve ever heard me talk about why people always make the “right decision at precisely the wrong time” – meaning they sell when they should be buying and buy when they should be selling – this is what I’m referring to.
It’s also why history shows very clearly that it’s always better to “buy low and sell high” when it comes to big profits and the kind of life-changing Total Wealth you deserve. You have more upside that way.
The other thing to keep in mind is that the markets tend to overwhelm every last fiber of bearish input over time. So, it’s not like you’re going to get taken to the cleaners even if you have the wrong perspective.
Case in point, there have been 35 corrections of 10% or more since 1950. And, 35 of 35 times, every single one of ’em has been a buying opportunity that erases every last penny of the losses that led to it.
Which is, again, why the data matters… and why you owe it to yourself to take emotions out of the equation as completely as possible when it comes to capturing really big winners and being a successful investor.
Despite commonly held wisdom to the contrary, the S&P 500 has spent three times as many days in bull market territory than in correction mode since 1950, according to Yardeni Research. And, as long as capital continues to grow, that is far more likely to continue than falter.
My colleague, Tom Gentile, has been showing his readers how to use S&P 500 ETF trades to double their investments in as little as two days.
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Reason #2: Unlocking Vast Piles of Cash at the Stroke of a Pen
Second, the merest hint of actual tax reform will send markets screaming higher.
Critics don’t believe this is possible, either, especially now that the markets have run up an incredible 23% since Trump’s election on nothing more than hope and a bull market that’s a whopping 8.5 years old.
Think about that for a second. Then, imagine what happens when there’s actual reform.
According to Moody’s, U.S. non-financial companies hold a staggering $1.84 trillion on their balance sheets, of which $1.3 trillion is held overseas. Apple Inc. (NasdaqGS:AAPL), which has long been regarded as the poster child for tax avoidance, holds an estimated 47% of that all by itself.
It’s a ginormous pile of cash that could be unlocked at the stroke of a pen.
We’ve seen this before, too.
In 2004, the Bush Administration enacted a similar tax break and the IRS estimates that 843 companies brought back a combined total of $312 billion. Most of those companies, incidentally, were in the tech and healthcare sectors, which is highly likely to be the case this time around, too.
Passing the $4.1 trillion budget last week was an important first step because it formally kicks off the process needed to enact major tax reform legislation later this year.
Again, most people don’t believe it will happen. There are huge disagreements about which rates to cut and how much, which deductions to ditch, and whether or not the tax package would be revenue neutral.
None of which matters.
What you need to focus on when it comes to big profits is that perception eventually becomes reality.
Reason #3: Money is On the Move
Third, the economy is in a lot better shape than most people think.
Chances are you have just as hard a time believing this, just as I do. What’s more, you know how hopelessly cooked government data is because we’ve talked about numerous examples here.
Yet, money is on the move and that’s what matters.
Here are just a few of the data points I see every day that make the case…
…manufacturing activity is at a 13-year high.
…service sector activity is at a 12-year high.
…airlines passenger loads are at record levels.
…median home prices are up 5% over last year.
…a record 6.2 million jobs are available in this country right now.
…unemployment is 4.2%, its lowest level since 2001; and,
…a record 43% of Americans surveyed believe the economy is in excellent or good shape, according to CNBC’s All America Economic Survey – a ten-year high.
Again, I get the whole debt, Rome’s burning, false news, political nonsense argument. I am the last person on Earth who will defend Washington’s nonsense. So, let’s get that off the table.
What most investors are missing (or simply refuse to believe) is that huge piles of cash are flowing into the world’s stock markets in search of the world’s best investments.
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Buyers in search of the future eventually overwhelm sellers fearing a repeat of the past or even the present.
Simply put, that’s why prices rise over time.
Capital, you see, is a growth engine, not just a way to keep score. As such, it will flow to where it’s treated best and can grow the fastest. In 1975, total world stock market capitalization was the then-unheard-of sum of $299 billion. Today that figure is near $77 trillion and growing.
Where most investors and many economists trip up is in presuming the growth in our future will be driven by the same things that drove our past.
That’s not true, especially now.
Take the marijuana sector, for example. Like it or not, a growing number of states are becoming more and more accepting of this once illicit practice. And for investors, it’s creating the opportunity of a lifetime.
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We live in an era where on-demand economic growth is changing the world far more quickly than most investors are capable of understanding. But, I’m not about to let you make the mistake of underestimating it.
The On-Demand economy – driven by the huge tech companies we talk about all the time – attracts an estimated 22 to 25 million consumers a year and may account for $57.6 billion to as much as $100 billion in spending per year, according to the Harvard Business School.
If you’ve ever purchased something from Amazon.com Inc. (NasdaqGS: AMZN), taken an Uber, or watched Netflix Inc. (NasdaqGS: NFLX), you’re already part of it. And, if you own those companies, so is your money. If not, your investments are fatally flawed.
Interestingly, I’m not the only one who thinks a big rally could be lurking in the wings.
Bill Stone, chief investment strategist for PNC Management, made the case on CNBC recently that the S&P 500 could jump 32% to an even more aggressive 3,368 in 2018 than the 3,000 I see ahead.
Said Stone, “All I did is look at what the consensus earnings were for 2018, take a look at where corporate bonds were yielding right now, and then assume corporate bond yields move up about one percentage point.”
Said Stone about people who think there’s no upside left, “Frankly, they just have to realize they’re wrong on that.”
My sentiments exactly.
Profits are driven by growth and growth is driven by people looking to the future. That’s why you want to constantly look ahead for profits, rather than in the rearview mirror.
And you won’t have to look far…
Coming up on November 8, a tiny start-up is expected to make a huge announcement that could trigger windfalls into the six-figures.
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This company just won a historic patent verdict and is now on the cusp of a 28,700% sales surge… and barely anyone’s heard of it.
Speaking of which, I don’t know if you caught the headlines this morning, but one of my favorite totally underrated stocks just became the world’s biggest e-Commerce Company again.
According to Bloomberg, Alibaba Group Holding Ltd. (NYSE: BABA) just passed Amazon in intraday trading yesterday and, in the process, put Team Bezos on notice that it will not go quietly into the night.
Alibaba’s stock is a great way to play the rise of Chinese consumerism, and very profitably at that, especially considering the company’s stock is up 109% for the year.
If you’re not on board, please consider re-reading the first section of today’s column when it comes to being part of the “herd”…
Best regards for great investing,