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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers