Will Growth Shift From Housing To Stocks?
A: Looking at the fundamentals that are powering both the US housing markets & stock markets, it is looking more and more likely that general speculation could shift from housing to stocks. Keep an eye on the 'best of breeds' in the stock market for the next few years!
It has been a little over 5 years now since the stock market had topped out and started its painful descent to the bottomless pit. It was also around this time where smart money started pouring into real estate across the country. Even with the horrific tragedy of 9/11, housing was resilient and continued to power its way up to record levels! So now what?
Why not the stock market!
Its important to note that the stock market is a LEADING INDICATOR of the overall economy, looking forward a good 6-8 months or so at what is to come. That is why the market uses P/E ratios to value a stocks current bid and asking price. For all you homegamers, P/E means Price to Earnings ratio, and represents what the company is trading at compared to its expected future earnings. Generally, a growth stock has a higher P/E ratio due to the fact that earnings are expected to grow in the near future. Whereas cyclical stocks generally have lower P/E ratios to go with their more predictable and sustainable earnings potential.
Now, there are certain underlying factors that I see that would signal a 'second coming' of the stock market in the years to come.
First, a new Fed Chairman. Mr. Bernanke is set to take over as Chairman of the Fed (arguably, the 2nd most powerful position in this country) in January, as Mr. Alan Greenspan retires. The street likes Mr. Bernanke as the replacement Fed Chairman, and his straightforward manner in which he conducts himself.
Second, the energy commodities have dropped down to more realistic levels, and seemed to stabilize. With Crude Oil around $57/Barrel and Nat. Gas trading around $11.50, they are down significantly from where they were trading at only 6 months ago. As long as energy prices remain down, businesses can keep costs lower, and earn more profits! Also, lower energy prices are necessary for the Fed to pause raising interest rates.
Third, a pause in interest rate hikes. The slogan 'Don't Fight The Fed', usually always rings true when it comes to the stock market. The idea is simple, the street likes LOWER INTEREST RATES, in order to avoid having other Capital investments be too attractive. After all, if you can get 8% interest in a money market account with ING online, why wouldn't you put your money there! As long as the Fed pauses with its interest rate hikes soon (expect another two 1/4 point hikes), the interest rate will not be high enough to pursuade most money managers to put their money to work in money market accounts. Rather, we need the money to go into stocks, where the expected return should be closer 8-9% for the year.
Fourth, housing seems to be slowing and speculators are beginning to look elsewhere. After the recent October housing #'s, and a nationwide noted slowdown, money seems to be coming off the table in the real estate sector. Where is it going? My bet is the smart money is getting into stocks right now!
Fifth, the NASDAQ is at a 4 1/2 year high! WOW! What a stat. It is 100% true that the NASDAQ stock market is now trading at almost a 5-Year high, as this tech laden indicator of the future economy continues to see huge money flows coming in. So whos buying? The fund managers and money managers that have seen this situation before. The recipe is getting very ripe for a stock market bull run, and the smart players are all over it.
So, you heard it here first. Im making the call right now that:
2006-2008 WILL BE THE YEARS OF THE STOCK MARKET AGAIN
When will you get in? Now, while its still cheap? Or, in late 2007 when the NASDAQ is over 3,000?
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