3 Reasons Stocks Can Go Higher in 2014

The stock market rally can continue. Here's why.

Jan 2, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The market is kicking off the new year slightly lower, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) are down 0.59% and 0.57%, respectively, just before 10:15 a.m EST.

After a stunning market performance in 2013, the notion that stocks have become overpriced and must correct is gaining ground. Here are three reasons that suggest the stock market can still head higher this year:

Investor sentiment remains muted
Last May, with a journalist's taste for hyperbole, I christened this bull market "the most mistrusted stock market rally in history." While last year's market performance has gone some ways toward erasing individual investors' skepticism regarding stocks, we are hardly at a point of general euphoria that characterizes the end of a bull market.

The most recent reading of the AAII sentiment survey has 43% of investors declaring themselves bullish and 29% bearish; those numbers are not wildly different from the results one year ago when 39% of investors were bullish and 36% bearish. Furthermore, the current bullish reading is lower than the maximum figures achieved since 1987, the first year for which the data is available. Conversely, the bearish reading is higher than the minimum figures seen since 1987.

Headline valuations appear reasonable
On the basis of estimated operating earnings for 2014, the S&P 500 is valued at 15.2 times earnings per share -- not the kind of P/E that inspires fear, or even concern. In truth, there are good reasons to be at least somewhat skeptical regarding that figure, which is based on an estimate that assumes 13% earnings growth this year, suggesting that analysts' forecasts may be a bit aggressive. The Shiller P/E, for example, which uses a 10-year average of inflation-adjusted earnings, is at 25.8 -- significantly above its long-term average.

However, the Shiller P/E is not widely used; most analysts and financial media refer to a P/E calculated on forward earnings and that is, therefore, the number investors focus on. Bear in mind that my thrust in this article are the reasons for which investors could push stocks higher, not whether all those reasons are valid.

The "Great Rotation" is only beginning
The notion of a "Great Rotation," in which investors would switch their assets from bonds into stocks, was very popular at the beginning of 2013 (according to Google Trends, use of the term peaked in February); however, if such a rotation is occurring, it is only in its infancy -- at least with regard to U.S. stocks.

While it's true that 2013 marked the first year since the Great Recession that saw positive flows into U.S. stock mutual funds and outflows from bond funds, the $20.9 billion in funds the Investment Company Institute estimates saw their way into stock funds is a trifling amount relative to the $527 billion that were previously withdrawn since 2008. Conversely, the $77.2 billion that came out of bond funds pale in significance to the $996 billion that went in prior to that.

The time is now: Here's the one stock you must own in 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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