Why It's Time to Buy Into the "Grand Canyon"

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Calling what we're experiencing a bull market is like calling the Grand Canyon a ditch.

First of all, this rally – the one that sprung us from the depths of the Great Recession, and has pushed the S&P 500 170% above its 2009 low – has largely regained lost ground. This historic "rally" has taken the bellwether index just 265 points beyond its October 2007 peak.

In other words, 153 percentage points of the rally since 2009 were necessary just to get us back to 2007.

We're up only a modest 17% from the old highs.

I wouldn't call that overdone. I call that a leg to stand on. And it's just the first leg.

This, as you'll see, is a generational bull market…

We're Not Overpriced, Even in a Record Market

The dividend yield on the S&P 500 back on Jan. 1, 2007, was 1.76%; as of Jan. 1, 2014, it was approximately 1.90%.

The benchmark's trailing price earnings multiple at the 2007 peak was 17.5. Today it's 19.

For some, perspective on whether today's average PE is high is based on PEs from Jan. 1, 1980, through Jan. 1, 1990.

The 1980s PE averaged 11.89; the 1990s PE averaged 21.73.

And the 2000 through 2010 PE averaged 29.58, a period skewed by the Jan. 1, 2009 PE of 70.89.

But if we replace the January 2009 PE – essentially, an outlier – with the 1990s average of 21.73, the 2000 through 2010 average is much lower.

With that adjustment, the 1990 through 2010 average PE is 23.42. So today's PE of 19 isn't flashing any warning yellow lights.

According to Birinyi Associates and WSJ Market Data Group, the market capitalization of the S&P 500 at the old October 2007 peak was $13.8 trillion. It fell to $5.9 trillion at its 2009 low. Today it's back up only slightly from the old peak to $13.9 trillion.

The whole market had a value of $20.9 trillion at the 2007 high and is up just 2% over the last six years to $21.4 trillion.

Whether you're looking at relative price earnings multiples or weighing valuation metrics, stocks don't appear to be overpriced or overvalued. In fact, they look poised to go higher, probably a lot higher.

Prices go higher when there are more buyers than sellers. But, there's an even bigger dynamic at play than buyers and sellers – there's the supply and demand equation.

More Equity Money and Fewer Equities Means Rising Prices

According to the World Federation of Exchanges, there were 9,000 companies listed on all U.S. exchanges in 1997. Today there are 5,000 listed companies; that's a 40% drop.

The shrinking number of listed companies parallels the rise of giant and specialty private equity buyout shops who have been taking companies private. At the same time, the 2000 tech bubble bursting reduced the former flood of IPOs to less than a trickle over the past 13 years.

The low interest rate environment engineered by the Federal Reserve also allowed companies to borrow cheaply to buy back their own shares. That's reduced supply too.

The combination of rising prices from companies buying back their own shares, more demand from sidelined investors coming into stocks as prices rise, and ever-larger pools of institutional investment capital chasing a considerably tighter supply of shares all lead to one thing: stocks to continue to rise.

With supply reduced, it won't take a lot of additional demand to propel stocks higher.

And there's good news on that horizon, too.

Join the conversation. Click here to jump to comments…

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Edouard d'Orange | January 9, 2014

    The reluctant bull…

  2. David | January 9, 2014

    The market will continue to go up. This is the last bull we will see for some time, so take advantage of it. Next up for a bull swing is emerging markets, which have been flat the past couple years.

    Once this rally runs out of steam in 2015, we will see the market plummet again. Next time, we won't have the rally that we have seen since 2009 because governments will be out of money and the baby boomers will be hording their cash, what cash they have left after the next cyclical bear market.

    Once the bear is dead, it will be the best time, during everyone's life, to invest in almost every market.

    Watch for the tell tale signs that the bull is on it's last days, pull everything or short the market and be ready to buy a year or two later.

  3. Bill | January 9, 2014

    Re stocks to go higher – this recovery has been driven by the arbitrary creation of money – ideally economic interaction should come first, and the creation of money necessary to facilitate it second. The cart is before the horse. Also, this economy is hollower than before: more people on gov assistance, higher taxes, fewer people (as a %) looking for work, a higher proportion of jubs with poor pay and benefits, etc. Just less underlying economic interaction on a per capita basis. You need to look beneath the accounting numbers.

    Value cannot be created out of thin air; money creation 'here' hurts economic activity 'there'. Over time, corrections will equal or exceed the perceived benefit.

    Your advice to buy stocks will net a gain (over time) only if each correction is correctly predicted and acted upon.

  4. Andrew Swan | January 10, 2014

    It's mentioned that in each decade the PE ratio is not far from where we currently are, but didn't each of those decades end in a major downward bust? Only now the PE ratios are a little bit more disconcerting. Hmm, that's not comforting.

    That being said, I have to agree, I see stocks prices gaining significant ground making many pretty wealthy up until they come crashing down far below what we're used. Unfortunately, I believe they'll take their sweet time to make any rebound this time around.

    Not trying to sway anyone else, please make your own decision, but for me, the idea of listening to this editor is a little unnerving. No thanks.

  5. H. Craig Bradley | January 10, 2014

    AMERICA HAS STAYING POWER

    Warren Buffet's famous words: " Don't Bet Against America" apply here for real businesses that produce real products or services. If you buy them and hold them, you WILL make money in the long run. In the short run, just about anything can and will happen. So, don't try to predict anything. Stock Markets come and go but America has continued on for over 200 years.

    Just buy quality stocks and try not to overpay. When you have a bull market like we have today with high P/E ratios (upper teens) then you are probably overpaying compared to levels found in bear markets. Right now, there is a kind of premium associated with most stocks. Making money fast is a method to try to beat the market (house) in the short term. Investing uses time. The more time you have, the better the odds. If you don't have time, you have to trade and win. That is always the lure. Greed is always good for Wall Street.

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