People called me crazy…
“Right now is the greatest moment to be an investor in my nearly two decades in the industry,” I wrote in the March issue of my True Wealth newsletter.
My headline for that issue was, “The Entire Stock Market Could Soar 95% in Three Years.”
Nobody wanted to believe me. Stocks had just finished 2012 with a 16% gain.[ad#Google Adsense 336×280-IA]But in 2013, stocks are already up 29%.
And they’re on pace for their best year since 1997, when stocks closed out the year for a 33% gain.
So could stocks really keep going higher from here?
In short, over the last half-century, history has shown that when interest rates are low, stocks get more expensive… and yet you continue to make money!
How can that be?
What most people don’t know is there is a strong relationship between interest rates and stock market values… This table shows what I mean:
As you can see, when interest rates are high, stocks are usually cheap at a P/E ratio of just 12. But when rates are low, stocks trade for much higher average P/E ratios… nearly 22.
Today, interest rates are incredibly low, near zero. Yet stocks trade for a P/E ratio of just 16.8. That’s below their long-term average P/E ratio… and well below the 22 P/E ratio they could trade for based on the table.
Astoundingly, even though stocks become expensive when the Fed cuts rates below 2.5%, they do very well when interest rates are low… Stocks actually perform best when interest rates are low based on history (compared with “all periods”).
Now, we know Janet Yellen – the newly appointed chair of the Federal Reserve – will follow Fed Chairman Ben Bernanke’s course. That means keeping interest rates near zero until at least 2016. This likely gives us another two-plus years of safe stock market gains.
And our potential is still huge…
You see, stocks could return 28% over the next two years even if P/E ratios stay at current levels. (Specifically, Wall Street analysts estimate the earnings for S&P 500 companies will be $135 in 2015. That’s about 28% more than today.)
But I doubt P/E ratios will stay at current levels. I expect they will go up…
Over the next two years, we’ll see more folks and more dollars forced into the stock market. You can’t live on zero-percent interest. So people will be “smoked out” of their safe investments, and they’ll move into riskier assets like stocks.
This could drive stocks up to their average P/E of around 22, given low interest rates. If that happens, the S&P 500 will soar to around 2,940 by the end of 2015… a 63% gain from here.
I know this sounds crazy. But it’s absolutely possible. The S&P 500 is up 21% in the nine months since I first wrote about this idea. Yet stocks are still incredibly cheap.
Things are already moving in our direction. And there is no reason to expect them to stop.
Yellen and the Federal Reserve will keep rates low for at least another two years. That is certain. This, in turn, will continue pushing money into riskier assets, like stocks and real estate.
The market is up big over the last few years. But I strongly believe stocks could soar another 63% in the next two years.
So you haven’t missed it. Now is still a great time to put money to work in the U.S. stock market.
Sponsored Link: Of course, I know this bull market will eventually end badly. And I’m preparing for that. In fact, I recently attended a closed-door meeting at the New York Stock Exchange… where details of the next stock market crash were revealed. You can get the full story right here.