Pundits are predicting a 15,000 to 17,000 Dow in the next year or so, up 16 to 31% from the 12,880 level at this writing. Compare stock earnings to stock price and the results of fundamental analysis tell us to buy stocks. Compare stock earnings to stock price and it is apparent that something other than earnings has been driving (or holding down) stock prices. Some days the European debt dilemma appears to be on the verge of correcting itself and some days it appears that a series of debt defaults starting with Greece will wreak havoc on the Continent. The concern about Europe is that if one of the two largest economies in the world (the EU and the USA) goes into a deep recession the effects will be felt throughout the world. Chinese exports are down as are those of many other Asian exporters. Reduced need for raw materials hits commodity suppliers such as Australia. Oil prices could fall despite the uncertainty regarding Iran. However, if the just approved austerity measures in Greece are the first step toward a EU debt recovery there is a lot of pent up value in the US stock market. Just compare stock earnings to stock price in stocks across the board.
After the market crash of 2008 the world entered the worst recession in three quarters of a century. This sort of thing makes previously aggressive investors turn conservative. Many have stayed out of the markets entirely. If the average retail investor reenters the stock market it could well herald a rally. There is a cyclical nature to the stock market and, if history is a guide, we are due for an upswing. The problem for the long term investor is to know if we are really ready for an upswing or not. Many were stung last year when the market rose to midyear only to enter a prolonged and volatile correction in the second half. The long term investor now has to compare stock earnings to stock price in order to succeed. He needs to be adept at picking new winners in any coming rally. A rising tide may raise all ships but this time honored analogy misses the fact that some stocks outperform the rest in a rally. Some conservative picks such as consumer goods stocks are great places to park your money during a recession but could be left behind when a bull market takes off. The point is to compare stock earnings to stock price now and pick the stocks that may be underpriced if the European debt crisis lessens and the US economy picks up steam.
If the market takes off those investing in gold may wish to hedge their bets and consider investing in oil or other areas that benefit from a strengthening economy. As always an investor is well advised to do his own fundamental as well as technical analysis before investing. Although we invite investors to compare stock earnings to stock price it will be wise to keep an eye on market sentiment in order to enter the market with the most profitable timing.