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Examiner
  • Ron Finke: How high can the stock market go?

  • By now you probably know that our U.S. stock market had a hugely successful first quarter. That is important, but even more important is, why?

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  • By now you probably know that our U.S. stock market had a hugely successful first quarter. That is important, but even more important is, why?
    Today I will share some facts but primarily conclusions about what has happened and where the market is headed in the quest to make your capital work harder.
    Most observers claim surprise and bewilderment about the Dow Jones and S&P 500 being at record highs. This leads some to fear that we are at a clearly unsupportable top, ready to plunge back to earth.
    However, if you apply standard measures, Mr. Market appears to be in the middle of a good cycle, not at the top. The price-to-earnings ratio is the most commonly used. The numbers for the three major indices range from 15.95 for the Dow, 17.05 for the Nasdaq 100, to 18.35 for the S&P 500 based upon the past 12 months profits.
    Stocks always trade long term at a multiple of annual profit. According to The Wall Street Journal (online.wsj.com/mdc), the same numbers fall to 12.9, 15 and 14.1 for estimated profits in the next 12 months. Historically, these are not in bubble territory.
    I prefer to also consider price-to-sales ratios. If a local business has any decent history, its owner wants at least one year’s worth of sales revenue at the time to sell. So, does it make sense that eight of the Dow 30 Industrials are selling at less than 1? This includes Exxon Mobil, Caterpillar, Boeing and Wal-Mart. More than 20 percent of the S&P 500 companies sell at less than one times sales. Stocks are not too high by this measure either.
    I believe 2013 will produce stronger returns than surprising 2012. Companies and investors are completely discounting the craziness of Congress versus itself, Congress versus the president, the whole mess. How else do you explain the lack of frantic worry and selling at year end before the fiscal cliff and more recently with the sequestration conflict? Enough of this! Let’s all get back to work and make our own progress.
    Unemployment remains higher than we all want, but that has never stopped Mr. Market. It is all about revenue and profit growth. These are likely to continue rising despite unease about Europe, politics, the usual messes.
    What about inflation? Because the speed at which money changes hands (its velocity) is still stuck in the mud, gold, silver and commodities in general are not moving higher in price. With trillions having been printed, it stands to reason that prices must rise some day. But for now, gold is 16 percent lower than its peak in August 2011 and is still in a downtrend. Silver is more than 40 percent lower than its 2011 high.
    Energy prices are in a moderate downtrend due to our increasing domestic inventories of crude and natural gas with the strong trend of rising production. The Saudis must be having fits over this development.
    Page 2 of 2 - Fed Chairman Bernanke thinks that since deposits in your local bank pay nothing, you will put all of your money to work in stocks and bonds instead. This plan has not worked well.
    In general, older Americans are stubborn. We will not intentionally hold our noses and incur risk but will put money in mattresses if we have to. A few more people have invested in stocks, but the uptrend so far has been caused by professionals, not by moms and pops. Nevertheless, life goes on and many will earn double-digit returns in 2013.
    (Past performance is no guarantee of future results.)
    Ron Finke is president of Stewardship Capital, a registered investment adviser. This is general advice and not meant to contain specific recommendations. Reach Finke at rcfinke@stewcap.com.
     
     

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