Why The Dow Can Go Much, Much Higher

 

By Bryan Rich 

January 25, 2017, 1:30pm EST                                                                                        Invest Alongside Billionaires For $297/Qtr

The Dow broke 20,000 today.  I want to talk about why it’s a big deal.

As we discussed when we entered the new year, “Trump’s Plan Is A Recipe For Restoring Animal Spirits.”  Watch out, it’s coming.

Remember, this (animal spirits) is the element that economists and analysts can’t predict, and can’t quantify. It’s not in the forecasts. This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mistrust of the system. All along the way, throughout the recovery  period, and throughout a tripling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset has been underway since the night of the election. And that gives way to a return of animal spirits.

Higher stock prices tend to beget higher stock prices. Trust me, individual investors that haven’t been believers will be calling their financial advisors and logging in to their online brokerage accounts over the coming days.  Institutional investors that haven’t been believers, that have been underweight stocks, will be beefing up exposure if they want to compete with their peers (and keep their jobs).

And not only do higher stock prices lead to higher stock prices, but higher stock prices tend to make people feel more confident about the economy, which begets a better economy.

Add to this, the psychological value of Dow 20,000 could finally be a turning point in the divergence of sentiment toward the Trump Presidency.  It may serve as a validation marker for those that have been on the fence.  And for those in opposition, as I’ve said before, growth solves a lot of problems!  When the college grad that’s been relegated to a 10-year career as a barista begins to see signs of opportunity for a better career and a better future, in a stronger economy, the sands of Trump sentiment can shift quickly.

Cleary, Trump entered with a game plan that can pop economic growth.  And he’s going 100 miles an hour at executing on that plan. For markets, what he’s doing is creating a sense of certainty for investors. They know what he’s promised, and now they know that he appears to intend on delivering on those promises.  And the coordination of growth policies, along with ultra-easy monetary policy (even with tightening in view) serves as risk mitigators for markets. It should limit downside risk, which is what investors care most about.  How?

Remember, even at Dow 20,000, stocks are still extremely cheap.

Here’s a review on why …

Reason #1: To return to the long-term trajectory of 8% annualized returns for the S&P 500, the broad stock market would still need to recovery another 48% by the middle of this year. We’re still making up for the lost growth of the past decade. And there’s a lot of ground to make up.

Reason #2: In low-rate environments, the valuation on the broad market tends to run north of 20 times earnings. Adjusting for that multiple, we can see a reasonable path to a 16% return for the year.  That’s an S&P 500 earnings estimate of $133.64 times a P/E of 20 equals 2,672 on the S&P 500.

Reason #3: The proposed corporate tax rate cut from 35% to 15% is estimated to drive S&P 500 earnings UP from an estimated $132 per share for next year, to as high as $157. Apply $157 to a 20x P/E and you get 3,140 in the S&P 500. That’s 37% higher.

With this in mind, we are likely entering an incredible era for investing, which will be an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade.  For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks.  Our portfolio more than doubled the return of the S&P 500 in 2016.  You can join me here and get positioned for a big 2017.