In June I made the fundamental case for the market to crawl its way to S&P 2200 based on the dynamics of money managers being forced into stocks as the only game in town.
We have nearly achieved that objective because of the reasons I provided.
But now the plot has thickened and I can make the case for 2300 this year. I'll describe that playing field in 3 parts...
Fundamental & Behavioral Mechanics
What are the drivers that have the market pushing new highs just below 2200 currently?
1) The Investment Machinery of Wall Street where trillions of dollars are ear-marked solely for stocks and managers "have to buy"
2) Extraordinarily Low Interest Rates and a Federal Reserve committed to avoiding any action that could lead to recession
3) Weak Global Economy and foreign central bank commitments (BOJ and ECB) making US equities the TINA (There Is No Alternative) stars of investing
4) Quantitative Factor-Investing whose current "Buy, Buy, Buy" input is the premium between the earnings yield on stocks and that of the 10-year Treasury
5) The Dividend Yield on the S&P 500 is 2.1%, 50 basis points higher than the yield on the 10-year Treasury
6) The Great Buy-Back Machine, fueled by low rates, "engineers" better EPS and sustainable investment tailwinds via steady net-buying demand
So how has the plot thickened since June to now make S&P 2300 likely this year?
More . . .
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Late Innings Magic
This 7th driver was actually a foregone conclusion of the narrative I gave you in June because it would have to occur for the market to move higher without earnings growth...
7) P/E Multiple Expansion is Inevitable in the Later Innings of a Bull Market
But I underestimated this part of the equation and how powerful it is at driving valuations higher in the late innings of a bull market. In fact, it has become more pronounced and more sustainable than even I would have predicted.
And it's based on what has actually occurred in the last 6 bull markets.
Since the 7th, 8th, and 9th innings of the bull tend to see the 12-month trailing P/E head over 20x, we also see money managers paying more for forward earnings.
In a mature bull that is still supported by a growing economy, professional investors will pay over 18x for next year's projected $125 EPS on the S&P.
And 18.4 X $125 = 2300.
The lesson of the last six bull markets is this: Never underestimate the investment machinery of Wall Street - whose fund managers "have to buy" in a growing economy - especially when they can use very cheap money to push valuations steadily higher in the later stages of the bull.
Technical Breakout & Strength
The market's move above an 18-month ceiling at S&P 2135 is no small matter. Stephen Suttmeier, the chief technical strategist for Bank of America/Merrill Lynch, is not just a guy who draws lines on charts. He dissects the historical data for important patterns.
The strategist did some major number crunching and found that when bull markets go sideways for over a year as this one just did, the resulting gains from a breakout to new highs are usually between 10% and 20% over the next year.
According to Suttmeier "Investors hate to chase a rally, but when the S&P 500 closes at a new 252-session (52-week) high after not closing at one for 300 or more calendar days, new highs should not be feared."
Just an 8% move higher from 2135 would put the S&P at 2305. A 15% gain would equate to S&P 2455. The quant-chartist explains further...
"The S&P 500 is up 91% of the time 250-trading days after this signal with an average return of 15.6% (14.8% median), which would put the S&P 500 well into the 2400-handle should these gains materialize."
The Future Points Up
While I think a steady economy and no significant shocks in China and Europe could support a move to 2400 sometime in 2017, there are just too many variables and too much time to bother calculating the odds of that possibility right now.
But 2300 seems very doable - even this year. Once again, the bull market is proving that fear and doubt present terrific buying opportunities.
I'm still keeping one eye on the fundamental shifts that would increase the odds of a recession, and thus of a bear market. But mostly right now, I'm getting ready to buy the next dip with both hands.
I suggest you do the same. Buy the dips and ride the bull for all its worth, but remember to be vigilant. When the bear finally comes, you can actually position yourself to profit - if you're ready for it.
I detail specific actions you can take in my Special Report, Zacks' Bear Market Game Plan.
It shows how to spot crucial warning signs that the bear is coming and tips you off to 4 bear market blunders you should avoid. Our Game Plan also reveals how to target substantial profits from the bear while other investors are paralyzed with fear.
We're providing this Special Report to you free, but your deadline to download it is midnight on Sunday, August 28. I encourage you to take a look today.
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Good Investing,
Kevin Cook
Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and noted for accurately predicting and tracking market movements. To help Zacks members get a head's up when the market starts to turn, he has released his Bear Market Game Plan.
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Zacks Investment Research