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| | Why the Lousy Outlook is Good for Stocks in 2013 | by Alexander Green, Investment U Chief Investment Strategist
Friday, January 4, 2012 |  | USA Today recently ran a column reviewing the 2013 stock market forecasts of Wall Street's leading firms. It was a tad underwhelming.
The most bullish stance comes from Citigroup, which sees the S&P 500 climbing 14%. The most bearish forecast came from Wells Fargo. It sees the S&P 500 dropping 2% in the year ahead.
That's not terribly pessimistic. And it underscores the perpetual optimism of Wall Street, which needs clients and customers to buy stocks and do transactions.
The stock market could drop a lot more than 2% next year. If I were to hazard a guess, however, I'd say it won't. The market, if anything, may just do surprisingly well next year.
Why? Because things are just so darn bleak.
Investment legend John Templeton said bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.
Do you know anyone feeling euphoric about the stock market right now? How about highly optimistic?
Me neither. And we have more than just anecdotal evidence.
Equity mutual funds have been hemorrhaging shareholder money not just for months but for years now. Stocks have more than doubled from the lows of March 2009 but this remains the most disrespected bull market in history. My friends in the brokerage industry say their good clients have mostly sat on their hands throughout this rally. The others cashed out near the bottom and never got back in. You know what they're thinking because the media saturates us all with it. The economy is weak. Washington is dysfunctional. Uncle Sam is drowning in red ink. The Eurozone is coming apart at the seams. Real estate - while no longer in a free fall - is mired in the muck. Consumers are overleveraged. Banks aren't lending. Businesses aren't hiring.
What these investors apparently don't know is that a dismal outlook is almost always positive for stocks. Why? Because optimistic investors get complacent and overpay for stocks. Pessimistic investors are wary and leave stocks discounted.
That's exactly what we find today. The S&P 500 currently sells for 14.5 times its companies' operating profits vs. the average of 18.9 over the past quarter century.
And it's not just that stocks are historically cheap. Interest rates are zero and the Fed is in an uber-accommodative mode. Inflation is M.I.A. Consumers are both saving and paying down debt. Economic output is now back where it was at its peak in 2007. Emerging markets - which contain three quarters of the world's land mass and nearly 85% of its population - are still growing at a 5% to 6% annual clip. Shale gas is creating a cheap, clean energy revolution. Corporate profits are at an all-time record. And so are corporate profit margins.
Of course, none of these factors make any difference to investors who - wittingly or not - are responding to fear, not reason. And, while it may be counterintuitive, this is exactly why stocks in 2013 may not just do better than Wall Street's (admittedly tepid) worst-case scenario but better than it's (admittedly tepid) best-case forecast.
In short, if bull markets die on euphoria, we can only conclude that stocks are still very much alive. It's the typical investor who is out to pasture.
Good Investing,
Alex
P.S. Although I believe the overall outlook for stocks looks rosy, the best way to increase your wealth is still finding individual businesses that are likely to grow no matter the latest macroeconomic scare. Just imagine if you had bought 10 shares of Berkshire Hathaway (NYSE: BRK-A) stock for $180 on May 10, 1965 - the day an enterprising, and soon to be renown, CEO took the helm.
Today, despite all the earth-shattering world events that have shaken markets since 1965, those 10 shares would be worth $1,350,000.
And I may have found a similar opportunity.
There's a little-known holding company that's quickly loading up on a cluster of very profitable, cash-generating businesses. It has aggressive management, a small market cap, and a share price that's greatly undervalued.
All the details are in the Investors' Forecast 2013 Issue of The Oxford Club's Communiqué, which you can receive today. Simply click here. |
   
Market Metrics Volkswagen Still Going Strong Volkswagen (OTC: VLKAY) was one of our favorite stocks in 2012.
We've been tracking the company since Ryan Fitzwater wrote about it last June, during the height of the Eurozone drama.
In his article, Ryan made the case that the popular automaker was being vastly underappreciated, simply because its headquarters were within Europe's boundaries.
As you can see in the chart below, Ryan's contrarian case proved to be strong. And the stock has gained over 50%. But we think there's still time to get in on the party in 2013.
In yesterday's issue of Investment U, Andrew Snyder published a chart in this space displaying December car sales growth for a handful of automakers - including Volkswagen. VW came in just behind Honda (NYSE: HMC), and far ahead of just about all the other companies listed. And despite the 50% rise in share price over the past six months, VW is still trading at just 1.08 times current book value.
As long as the Eurozone can keep itself together in 2013, this could be another great year for the German automaker.
- Justin Dove 
Click here to view the full chart. |
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