Stock Market Could Be Starting the Best Three-Year Run We've Ever Seen
Stock-Markets / Stocks Bull Market Mar 04, 2013 - 02:28 PM GMTBy: DailyWealth
Dr. Steve Sjuggerud writes: I believe the stock market could rise 95% in the next three years. But if you position yourself correctly, you could make much more than that...
This isn't just hopeful thinking on my part. It's based on rational thought... backed up by a mountain of data and experience from my lifetime of investing.
I could be wrong, of course. Stocks might not go up as I expect. But even if I'm only half-right, you'll still make nearly 50% on your money. Isn't that worth it?
Right now, several incredible forces are working together to push stock prices higher. Over the next three days, I'm going to show you each one. Today, we'll start with something you might not believe...
U.S. stocks are the best value they've ever been during my investing lifetime.
The upside potential in U.S. stocks over the next three years could be the biggest in my near-20-year career. And all stocks have to do is return to their average.
In short, stocks are 49% below fair value, based on a simple historical measure. This means your upside potential is enormous.
Let me explain...
The most common measure of a stock's value – whether the market is cheap or expensive – is the price-to-earnings (P/E) ratio.
It is easy to understand. For example, say you're looking to buy a $150,000 investment property that pays you a net rent of $10,000 a year. You're buying that property at a P/E ratio of 15 – the price (P) divided by the net rent or earnings (E).
Since 1950, the stock market's average P/E ratio has been 17.8. A couple points above that level is traditionally considered expensive. And a few points below that is traditionally considered cheap.
That's the simple, conventional wisdom. But it's a bit too simple...
Let's add one wrinkle to this math... because it helps show just how incredible the opportunity is today.
What most people don't know is there is a strong relationship between P/E ratios and interest rates... The numbers are downright crazy. And with interest rates at zero today, these numbers REALLY work in our favor...
This table shows what I mean:
You see, when short-term interest rates are punishingly high – above 6% – the average P/E ratio of stocks is low... It's only 12.
But when short-term interest rates are low – below 2.5% – the average P/E ratio of stocks is high. It's 21.8.
Judging by this table, what should the stock market's P/E ratio be? Today, we have the lowest rates in history – well below 2.5%. Where is fair value for stocks here? What is the right price to pay for a business when interest rates are this low?
Recently, superinvestor Warren Buffett gave us a clue... His Berkshire Hathaway holding company bought food-processing giant H.J. Heinz. He paid 23 times earnings for it (in other words, a P/E of 23). The world's greatest investor wouldn't have bought it if he didn't think it was a good deal.
Based on evidence of the last 60 years, the stock market's P/E ratio should be at least 21.8.
The crazy part is, we are nowhere near that number now. And when you look ahead, we are far below that number...
Right now, the stock market is trading at a P/E ratio of 17.5. But the horizon we're looking at is three years from today... when 2015 will be "in the books." Looking out to year-end 2015, based on analyst estimates, we are currently trading at a P/E ratio of 11.2.
This is the best value I've ever seen.
Remember, we're looking at 95% gains just to get back to historical fair value. Stocks have room to double from here. Invest accordingly.
Good investing,
Steve Sjuggerud
P.S. Tomorrow, I'll show you another incredible force that will propel stocks to higher levels than anyone can imagine. Don't miss it.
Editor's note: Steve and his team have spent the last several years and nearly $1 million designing a computer system to take the human error out of investing... and help you beat the market over the long term. He calls it True Wealth Systems. Large hedge funds spend millions of dollars for this kind of data. Click here to learn more about how regular investors are using it to profit right now.
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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.
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