I know. I write stuff like this and I get accused of (yes, rampant) drug use. Ironically, I am one of the few people I know who can honestly say that I’ve never indulged.
So right after I pen some craziness, I always say the same thing: Hear me out.
A recent Merrill Lynch (MER) report is calling for a 15% drop in housing prices in the coming year. The Fed cut twice in the last several weeks. What does all this mean? Simply, that real estate, bonds, and interest bearing accounts will be lousy investments this coming year.
There is a theory (one I subscribe to) that the stock market would have been much higher over the last few years except that housing and commodities were too hot of an investment… so housing and commodities was where the money flows went.
With cooling (not freezing, cooling) housing, cooling jobs, both housing and commodities are beginning to move downward. Certainly, there will not be big returns to be had in either in 2008. So money will be moving to where money can be made: stocks.
Stock valuations are still historically low. We could easily move to 15,000 and still have reasonable market P/E, and stock-price-to-corporate cash valuations that are well within historical ranges. Further, valuations combined with lower interest rates will continue to drive M&A.
So the Dow will easily get to 15,000 by year’s end.
“But what about the economy?” What about it? The stock market and the economy are not the same thing, sometimes they move in lock step, and sometimes they don’t. Remember in 03 and 04 when we had our ‘jobless recovery’? Markets did great and the economy did only pretty good. Look for that again this year.
So what to buy? Right now: Money Center Banks and Brokerages. For two reasons: First, they have been crushed, and the worst is over. These stocks will move up in anticipation of improving valuations, and once valuations improve (think 3Q) the stocks will go up some more. Second, it’s volatile times like these that drive scared, stressed, confused investors into the waiting arms of their broker. Expect record earnings from that part of the business.
Speaking of housing, one pet peeve: Falling housing prices are the headline of the day, and every person I talk to is concerned about it. And I always say the same thing: Are you selling your house this year? No? Then what the hell do you care? This doesn’t affect you.” Stay diversified, even if it’s just a 401k. There will be money to be made in stocks this year and money will be made in housing another year. Over time, everything goes up in value, so relax… and unless you just want to be depressed, turn off the 24 hour depression machine known as cable news.
PS. There will be a ton of volatility in the market between now and election day. Then a 10% move up if a Republican is elected and a smaller, muted move if a Democrat is elected (markets like gridlock and the Dems will continue to hold both chambers of Congress).
Disclosure: As of publication, I am long MER, though positions are subject to change at any moment.