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Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Why Stock Market Could Go 50% Higher From Here

Stock-Markets / Stocks Bull Market Oct 08, 2013 - 12:00 PM GMT

By: DailyWealth

Stock-Markets

Dr. Steve Sjuggerud writes: Most people don't get the idea I'm about to share with you... or they're not willing to accept it.

However, it's 100% true...

The idea is that value is RELATIVE when it comes to investments. And this concept is hugely important today.


Once you understand this, you'll see how the stock market could soar 50% or more from here.

Nobody is saying that now. But I think you'll be hearing more talk like this soon...

Let me explain... starting with a question…

Does 10% interest on an FDIC-insured bank CD sound good to you?

Today, you would say, "Heck yeah!"

It sounds good because relative to all the other investments, a safe 10% in the bank is fantastic.

But what if it were 1981?

Back then, it would have been a bad deal...

In 1981, you could find plenty of other investments paying more than 10% interest. Bonds, bank CDs, and bank savings accounts were all paying 12%-plus interest.

Why would you accept 10% interest when you could get 12%-plus?

My point is, value is relative to what else is out there... And today, it's no contest... The value is in the stock market.

Look... You earn zero-percent interest in the bank. You earn less than 3% interest if you're willing to lend money to the government for 10 years (which I am not willing to do!). Yet stocks today have a forward "earnings yield" of 7%-plus.

"Earnings yield" is simply the price-to-earnings (P/E) ratio reversed... It's the E/P ratio. The current forward P/E ratio is 13.7. The inverse of that is 7%.

We can use earnings yield to compare stocks apples-to-apples with other assets.

So what sounds best to you?

• 0% in the bank

• 3% in 10-year government bonds

• 7%-plus in stocks

Based on those three choices, the answer is obvious – you want your money in stocks. The relative value is just too good to pass up.

Comparing yields this way isn't perfect, of course. But it is a simple way to compare investments when you're looking for mispriced assets. And something is severely mispriced today...

Stocks shouldn't be offering a yield that's so much higher than bonds. Something has to happen to bring their yields closer together.

Either stocks need to soar (which would bring the earnings yield down) or government bonds need to crash (which would bring their yield up).

Let's say government bonds crash, causing interest rates to go from 2.6% to 5%. For stocks to have an earnings yield of 5%, they'd have to rise 50%.

Looking at it another way, if interest rates stay the same, stocks would have to more than double in value to push their earnings yield closer to what bonds are paying.

Remember, when it comes to investing, value is relative. And right now, when you size up financial assets, stocks win by a mile.

Good investing,

Steve

P.S. I think stocks have a long way to go from here… But eventually, we'll face another crash. If you had to start preparing yourself and your family for that crash… what would you do? What assets would you buy? No one can know the future with certainty... But a while back, I attended a closed-door meeting at the New York Stock Exchange... where details of the next stock market crash were revealed. For the full story, click here.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2013 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

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