US stocks can still climb higher: analysts

PUBLISHED : Thursday, 07 March, 2013, 10:34am
UPDATED : Thursday, 07 March, 2013, 10:34am

The combination of record low interest rates and slow but steady growth mean US markets can still power higher, even after the Dow punched its way to an all-time high, analysts said.

But with the Dow Jones Industrial Average up nine per cent over the first 10 weeks of the year, few doubt there is room to pause - though Wednesday’s action showed no sign of it.

Five years after an exploding stocks and property bubble put the US economy in the ICU, share markets are back with a vengeance.

Exactly 48 months after hitting bottom, the Dow burst through the old record Tuesday, a 118 per cent gain from the trough.

The S&P 500 remained just shy of its record, but had risen 128 per cent since the bottom.

The two indices closed up again on Wednesday, the Dow adding 0.3 per cent to close at a new record, 14,296.24, and the S&P gaining 0.1 per cent to 1,541.46.

The heady nature of the rebound, hardly pausing even as the overall economy’s comeback has stumbled and stuttered, has surprised even the most aggressive market analysts.

But investors, still mindful of the bullish predictions of analysts that continued straight through the last market peak on October 9, 2011, are asking whether this is just a new bubble waiting to pop.

Many remain acutely aware of how much wealth was wiped out by the crash -- a 54 per cent fall in the Dow over 15 months.

Analysts stress a number of factors that support more market gains: still-low interest rates unaccompanied by inflation; market valuations of companies still significantly lower than those at the previous peak; and an economy still in recovery mode with much room to grow.

“The economy is in a better place. The last time we were here, the economy was about to fall off a cliff,” said Art Hogan of Lazard Capital Markets.

In addition, there are few other choices for the savings of many, individuals and companies, still languishing in bank accounts earning next to nothing.

Except for stocks, said Peter Cardillo of Rockwell Global Capital, “The bottom line is that there is just no place to put your money at this time.”

Analysts concede that the run-up has been steep and has tested fundamentals.

But many point to the market-average standard for measuring stock value, a company’s market price versus its earnings -- the p/e ratio -- as still in an acceptable range, around 14, much lower than in 2007, when it topped 17.

Wells Fargo Advisors also point to health corporate earnings growth, on average up 9.6 per cent for S&P 500 companies in the fourth quarter.

The results “were better than what we or The Street was expecting,” they said, forecasting growth of 5.0 per cent for all of this year.

Key to the rally holding up is the belief that the Federal Reserve will not tighten monetary policy much, if at all, for the next two years, and so interest rates will remain low.

There were doubts in recent weeks that this would be so, as evidence has risen of active debate within the Fed over whether it is risking too much now with its stimulus efforts.

But Fed chairman Ben Bernanke last week stressed that the efforts were necessary as long as unemployment, now at 7.9 per cent, remains high.

That was confirmed with the release of the Fed’s Beige Book regional economy survey released Wednesday. It showed growth still modest at best and hiring around the country weak.

IHS Global Insight’s Erik Johnson said it did not see anything to push the Fed into tightening policy this year.

“We don’t expect the labour market to improve substantially until next year,” he said.

David Kotok of Cumberland Advisors said that the Fed’s rock-bottom interest rate and injecting money into the economy make it hard to value any asset, whether stocks, real estate, art, or other collectables -- all of which are rising.

“We are nervous and concerned about the eventual unwinding of this policy, but for the time being we are bullish and fully invested,” Kotok said.

Still, worries remain that stock prices have outrun their fundamental value and the markets have become frothy, if not overinflated, and are due for a correction.

“I don’t think the rally is over,” said Cardillo. “But the market needs to take a little bit of a rest. It just can’t continue to go up on a daily basis without taking a breather.”

That could mean a setback of as much as 10 per cent, he said, but nothing like the crash of 2007-2008.