Inside Wall Street: Ed Yardeni's Dozen Reasons to Be Bullish
Not so fast. There's a sunnier side to consider.
Back in March 2009, none (except for a few savvy observers) realized stocks had dropped to ground-zero level. One of those who did was Ed Yardeni, president and chief investment strategist at Yardeni Research. And now, he sees the market going even higher, based on economic and market factors.
Since the Standard & Poor's 500-stock index bottomed at 666 on an intraday basis on Mar. 6, 2009, it has rebounded more than 68%. On a closing basis, the S&P bottomed at 676.53 on Mar. 9, 2009. Because of such a surprising advance since then, plenty of commentators are now suggesting that a major correction has to take place, if the market is ever to see daylight again.
The Likelihood of a Breakout
For another perspective, let's look at the technical and fundamental forces driving the market.
Simply stated, the market is still marching to the drumbeat of the bulls: The Dow Jones industrial average, which now stands at 10,564 continues to be in an uptrend, hitting higher highs, and higher lows. "As long as the Dow continues to do that, we are in a bull market," asserts Carl Birkelbach, president of Birkelbach Investment Securities, who for the most part bases his analyses on the market's technical chart and profile.
Right now, there is a likelihood that the Dow will "break out and pierce the current upside resistance level of 10,730, and drive up to as high as 11,260," predicts Birkelbach. That would be a 62% retracement of the Dow's drop from its record high of 14,164.53 on Oct. 9, 2007, to its low of 6,547 on Mar.9, 2009. And he predicts the S&P 500, which dropped from a high of 1,576 on Oct. 9, 2007, to its low of last March, will bounce up to 1,266. The S&P is currently at 1,140.
Yardeni was quick to recognize the market's chilling low point in March 2009, and he proclaimed it in writing. In his Morning Briefing report to clients on Monday, Mar. 16, 2009, Yardeni wrote: "We've been to Hades and back. The S&P 500 bottomed last week, on Mar. 6, at an intraday low of 666. This is a number commonly associated with the Devil. The market soared from Tuesday's low to close up 13.6% last week, to 756.55. . . . The latest relief rally was sparked by lots of good news for a refreshing change, which I believe may have some staying power."
The S&P 500 at 1,330-1,350?
It was a bold pronouncement at the time when most investors had given up. Perhaps as bold now, Yardeni's forecast has the S&P 500 climbing to between 1,330 and 1,350 before year-end. And more important, he cites a "dozen good reasons to be bullish," which are based on solid fundamental grounds. Yardeni says:
- Sentiment has been bearish, with most investors convinced that this will all end badly. However, the bears have yet to stage a serious correction in stock prices.
- There's ample liquidity to push stock prices higher. Money has been pouring into savings deposits, with yields close to zero and will likely to remain that low through year-end.
- Corporate cash is soaring. It rose to $1.52 trillion during 2009's third quarter, matching the previous high a year ago. Among the most aggressive buyers of stocks recently have been companies buying other companies for cash.
- The Federal Reserve Board is likely to maintain its zero interest rate policy for an extended period of time, making liquid assets less compelling to hold than stocks.
- Corporate earnings should continue to rebound. Some Wall Street analysts predict the S&P 500 companies will earn almost $100 a share in 2011, up more than 20% from 2010's estimate.
- The market's valuation is compelling, with price-earnings ratios relatively low for the overall market, and for many sectors and industries. The market's current p-e based on 2011 earnings is 13.5, which would put the S&P 500 at 1,350 at yearend.
- The upturn in the profit cycle should revive employment and capital spending because the correlation is very strong between the yearly change in S&P earnings and yearly growth of the index of Coincident Economic Indicators.
- Productivity is growing rapidly and making new highs, suggesting real pay per worker will continue to do the same.
- The global boom, which started in the early 1990s, is staging a comeback, with the worldwide economy clearly recovering at a solid pace.
- Forward-looking signs are very bullish, with the U.S. Index of Leading Economic Indicators rising again in January, the 10th consecutive increase.
- The sovereign debt crises around the world should force governments toward greater fiscal discipline.
- A major change in Congress is expected this year that should result in a more fiscally conservative legislature.