With stocks continuing their positive run year-to-date, investors have a lot to be happy headed into 2015. The MSCI World is up 6.5%, but there’s reason to believe the bull can still run higher—potentially much higher.1
Below are four reasons to be bullish on stocks. There’s plenty more that could be said about each of these, but here are the highlights.
Politics is an ugly business, but under the right conditions, stocks love it. After the midterm elections, Republicans control both houses of Congress and Democrats hold the White House. This makes gridlock likely through 2016, meaning contentious laws that could potentially affect property rights, regulations or the distribution of capital aren’t likely to get passed. This is one contributor to positive markets since 2010’s midterm gridlocked government. Stocks love gridlock and like knowing it’s here to stay for the next two years.
This is why post-midterm results are overwhelmingly positive. As Exhibit 1 shows, markets are up well above average during the three quarters around and after midterms. Q4s and the following Q1 and Q2 in midterm-election years have registered positive returns 86.4% of the time.
Exhibit 1: The Post-Midterm 86.4% Miracle
According to legendary investor Sir John Templeton, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
A frequent lament in the financial press is that stocks are expensive and valuations stretched, indicating irrational exuberance—euphoria. But that’s simply not the case.
The MSCI World Index’s 12-month forward price-to-earnings ratio, a common way of looking at how expensive stocks are, is currently 15.92. That’s just a touch over its long-term average of 15.6, showing stocks aren’t stretched. If investors were euphoric, valuations should be much more stretched. And that’s not to say investors would care. Neither of those applies today—sentiment is middling.
Record profits are stuffing corporate balance sheets with cash3. All that cash is being put to work through rising business investment, increasing mergers and acquisitions and disbursed to shareholders directly.
Corporations are returning an increasing share of their growing cash piles to shareholders in the forms of dividends and share buybacks. Dividends are a bonus for equity investors on top of the big bull market’s rising stock prices. Share buybacks reduce the number of a company’s outstanding shares, reducing the supply of stock, increasing shareowners’ stake in earnings, both factors that can help boost prices. Corporations are strong and deploying their cash.
The Leading Economic Index (LEI) is a composite of ten forward-looking economic indicators, which combined give a telling picture of economic direction.
In the last 50 years, no recession has ever followed a rising LEI trend. Currently, the LEI is rising and even accelerating. The most recent read in October was a 0.9 percent increase, following a 0.7 increase in September4.
The Leading Economic Index image
These five factors are a small part of evaluating stocks, but a helpful reminder of why we’re bullish through the year and likely beyond.
1 FactSet, Inc. MSCI World, net returns 1/2/2014 through 11/21/14.
2 FactSet as of 11/14/14.
3 Source: FactSet, Thomson Quantitative Analytics as of 9/23/2014; Corporate profits, Nonfarm Nonfinancial Corporate Business total liquid assets, Gross Domestic Nonresidential Fixed Investment & US Corporate Share Buybacks from 3/31/2004 to 6/30/2014.
4 The Conference Board as of 11/20/14.