Following is a slightly revised article first published on TheStreet on 12/12/2014.
The S&P 500 decidedly broke out resistance level in November and is continuing its upward trend. As of December 14, the S&P 500 is up over 12% year-to-date. Guess what? As the 2014 third quarter earnings report season comes to an end, the S&P 500 trailing 12-month earnings growth is exactly at 12%!
The U.S. stock market is boring since it simply follows the earnings growth rate, but there is a lot of excitement in Asia. Fueled by the Shanghai-Hong Kong exchange connect this year, after a lackluster year in 2013, the China Shanghai Stock Exchange A Share Index has rocketed 43% higher year-to-date. India BSE SENSEX Index also has a great run, rising 30% so far this year.
GOLDILOCKS ECONOMY IN US
The U.S. economy is slowly hitting on all cylinders, and is expected to continue its stable upswing in 2015. Here are some indicators that illustrate why:
- The Index of Consumer Sentiment from University of Michigan rose above its long term average of 80;
- Weekly Initial Unemployment Claims are near 40-year lows;
- Housing Starts are improving;
- ISM Manufacturing PMI Composite Index is staying well above 50 level;
- Low inflation expectations from falling oil prices and record expansion in solar utility industry.
Corporate earnings growth, the most reliable market gauge in the U.S., is forecasting 10% growth in 2015.
WHAT MATTERS IN MATURE BULL MARKET – EARNINGS
Investors should focus on companies that can increase the most earnings per share efficiently while maintaining low valuation and not be afraid to increase cash allocation. With the U.S. dollar strengthening, lower energy prices and higher consumer spending, the best bets would be on growth at reasonable priced stocks from consumer discretionary and information technology sectors. With 10,000 baby boomers turning 65 and eligible for Medicare per day and the costly implementation of Obamacare, demands and innovations in the healthcare sector will create tremendous investment opportunities.
In the large cap growth space, our Focus Growth computer model’s current favorable stock is Western Digital (NASDAQ: WDC) with a 5.8% allocation. WDC’s 1 year EPS growth rate is 64% and the dividend increased by 46% over one year ago, with P/E/G of only 0.76. The valuation in the small/mid cap growth space is too frothy right now, therefore our Earnings Growth computer model has gradually raised cash to a 30% level, and is patiently waiting for sell-offs to deploy cash.
NO BEAR MARKET IN US
To quote Sir John Templeton, “Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Investor sentiment indicators, such as the AAII Investor Sentiment Survey, continue to show a narrow bull-bear spread, indicating that general investors are still skeptical about this five and a half-year-old bull market. Investors and traders continue to embrace momentum trades, creating volatile yet profitable market condition. Bears will probably come out of hibernation when broad-based investors turn to buy-and-hope strategies again and become euphoric about the stock market.
Until then, as Warren Buffett said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
Investing in the financial markets involves risk, including the risk of principal loss. Don’t invest with money you can’t afford to lose. Information in this report is in no way intended as personalized investment advice and should not be interpreted as such.