I have been ranting like a broken record for the last several columns about how stocks are cheap and should provide great returns for the next few years.
Over the past six weeks, I’ve explained why the Dow Jones industrial average should crack 19,000 by the end of this decade, why the “five-year three-peat” should usher in a bull run, and how the “global synchronized boom” should propel earnings and stock prices.
All those long-term “shoulds” may make you think of the transcontinental explorers Lewis and Clark standing on a peak and peering across the landscape to the next faraway peak. The long-term plan is all well and good, but what about the space between now and the next mountaintop? What sort of pitfalls might be ahead and how rough will the travel be?
No one knows. But I do know that if those two explorers had focused on the pitfalls and worried about the rough road ahead, they would have stayed in Louisville.
If you focus on the vast array of potential economic potholes, the only place you will feel comfortable putting your money is in short-term Treasury bills or the bank. Doing that will never get you off square one because after you pay taxes and figure the cost of inflation, your earnings will be zero.
Investors often equate a rough road with market volatility. Lately, the road has been pretty smooth in that regard. In a normal year, there is more than a 33-percent spread between the year’s stock market high and low. In 2003, the swing was almost 40 percent, quite a bit rougher than average. Last year, the spread was only about 14 percent, which was abnormally smooth.
Since it would be unusual to have an extended period of smooth sailing, my bet is this year will have some swells.
If we are in the midpoint of the swell and the swells are average, the normal spread would equate to about 1,800 points, either way, on the Dow Jones industrials. I’d like to think we are closer to the trough than the crest, with maybe 1,000 points on the downside and 2,500 on the upside.
One thing that will help drive prices to the upside is increased merger and acquisition activity. According to Standard and Poor’s, non-financial companies in the S&P 500 have more than $600 billion of cash on their books and that number is going up.
It is going up because U.S.-based companies have this year, and this year only, to bring back to the homeland earnings they made overseas and have squirreled away in foreign piggy banks to avoid paying U.S. income tax.
The Treasury Department doesn’t use the technical term “squirreled away.” It calls it repatriation of foreign earnings. The deal is companies can bring the earnings back home and pay only 5.25-percent tax on it.
The money is coming back and further swelling the companies’ coffers, which then could be used for an acquisition. Guesstimates are that an additional $400 billion could be repatriated, and since the money can’t be spent on executive bonuses or perks, some will probably be used for M&A.
In January, M&A activity was at the highest level in five years. Big companies are looking at the next peak and are buying. You should, too.
Dave Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or email@example.com.