In February 2013, I made a bold statement…
Most folks probably thought I was crazy. But if you’d followed my advice, you would have made a lot of money. And the same opportunity exists right now…
Back then, I told my True Wealth readers why stocks could rise 95% by the end of 2015 – less than three years’ time.
It was a gutsy call… But the S&P 500 is up 34% since then… And there is another 46% upside remaining over the next 17 months. Let me explain…
[ad#Google Adsense 336×280-IA]Last week, I told DailyWealth readers why stocks are STILL cheap.
To understand the value in the stock market, you need to consider two things… 1) company earnings, and 2) the economic situation.
In short, we need to look at a normal measure of value – like the price-to-earnings (P/E) ratio – and interest rates.
By considering both of these points, it’s easy to see a lot of upside left in U.S. stocks…
Since 1950, the stock market’s average P/E ratio has been 17.8. But the “right” P/E level depends drastically on interest rates.
When rates are low, like today, stocks trade for much higher levels. And when they’re high, like the early 1980s, stocks trade for much lower P/E/ levels. Take a look…
As the table shows, interest rates have a HUGE impact on the price of stocks. When rates are high, investors tend to take that safe and stable return. And they won’t bid up the price of stocks.
But when rates are low, there is no alternative. Investors have to do something with their money. They can’t buy bonds, so they buy stocks regardless of the price. Of course, prices rise to much higher levels than normal.
The S&P 500 trades for a P/E ratio of 18.4, as I write. That’s a bit high based on history – if you ignore interest rates. But with rates this low, we could see P/E ratios continue to rise to much higher levels.
This is exactly what I told my True Wealth readers in February 2013. If the P/E ratios moved to their historical average, based on interest rates… and earnings continued to grow as analysts expected… stocks could return 95% by the end of 2015.
The S&P 500 is up 34% since I made that prediction… a fantastic return. But it’s not the end of 2015 yet… And we still have 46% upside over the next year and a half. The table below shows the full details…
If earnings grow as expected, and stocks move to their average low-interest-rate P/E, we could see another 46% in gains by the end of next year… putting us perfectly in line with my original 95% prediction.
Of course, there are no guarantees. Stocks don’t have to trade at a 21.8 P/E by the end of next year and earnings could disappoint. It’s even likely that the Federal Reserve will raise interest rates (though they should stay low enough for the numbers above to remain true.)
The important thing isn’t exactly how high stocks go by the end of next year. It’s that, with rates low, stocks are the only game in town. And they still offer the possibility of a 46% gain, even after the huge move we’ve seen.
Our opportunity is great. Don’t miss out.
Good investing,
Steve
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Source: Daily Wealth