4 Reasons to Buy Stocks Now

Value Added

4 Reasons to Buy Stocks Now

If we can get past the fiscal cliff, the market should rally. That's the word from Jim Stack, one of the market's best forecasters.

James Stack is well worth listening to. The editor of the InvesTech Research Market Analyst newsletter boasts a record that puts the competition to shame. Over the past ten years through October 31, his recommendations have returned an annualized 10.7% -- compared with an annualized 6.9% for Standard & Poor's 500-stock index, according to the Hulbert Financial Digest.

SEE ALSO: Kiplinger's Economic Outlook

Stack hasn't missed a major market turn since predicting the onset of the 2007-09 bear market almost to the day. After the S&P 500 tumbled 55.3%, Stack turned bullish soon after the March 9, 2009 market bottom. (I based a March 10th piece on his optimistic stance.) He's been bullish ever since, and for the most part his optimism has been borne out. From the bottom through November 23, the S&P has returned a cumulative 125.4%, or 24.5% annualized.

Stack, who's based in Whitefish, Mont., isn't changing his tune now. Here are four reasons why he thinks the bull market will continue -- if we can get beyond the fiscal cliff.


1. Consumer sentiment is strengthening. In spite of a tortuously slow economic recovery, the U.S. consumer is alive and kicking. In fact, consumer sentiment is at its highest level since the onset of the recession in late 2007 -- although it's still low, considering that we're more than three years into the recovery. "Despite all the bad news, the consumer refuses to cave," Stack says.

2. The economy continues to show signs of growth. Stack looks most closely at two studies by the Institute of Supply Management: its survey of manufacturing and its report on the larger services segment of the economy. Both surveys currently point toward more growth ahead. "Leading economic data suggest that the fear over the fiscal cliff may be overdone," Stack says.

3. Technical indicators show that the market is healthy. Although Stack puts a lot of weight in economic indicators, at the end of the day he is a technician -- someone who makes his market forecasts based mainly on what the market itself is telling him. The picture here is somewhat mixed but, on balance, positive.

Among the indicators pointing in the right direction is the market's ratio of advancing stocks to declining stocks. A healthy market has more stocks going up than down -- and that's the situation today. Stack also looks closely at the number of stocks reaching new 52-week highs as opposed to ones reaching new lows -- the higher the ratio of new highs to new lows, the better. That indicator, too, is bullish.


Stack also constructs an index of stocks in economically sensitive sectors that he calls his bellwether index. His index is pointing higher.

4. The stock market is reasonably valued. Based on the past 12 months' earnings, the S&P 500's price-earnings ratio is 16. The average P/E over the past 83 years is 17. Bear markets usually start when valuations are higher.

Not everything is rosy, however. It almost never is. The biggest negative, of course, is the fiscal cliff -- huge spending cuts and tax increases that are slated to take effect January 1. If by that date Congress and the White House haven't reached agreement on a plan to prevent the automatic cuts and hikes from taking effect, the economy would likely head toward recession and a bear market would probably materialize.

Largely as a consequence, the Conference Board's survey of CEO confidence has declined to near dangerous levels. When executives are pessimistic, they don't expand their businesses and they don't hire new employees.


The market's technical picture has a few clouds in it, too. Most notably, the Dow Jones transportation average has been going sideways. In a healthy market, it should be rising along with other stock indexes.

Add everything together and you get a somewhat murky but largely positive picture. "The economic and technical evidence isn't warning us of an imminent bear market," says Stack. As a result, he recommends that his subscribers keep 77% of their investments in stocks.

Stack sees the stock market and the economy at an inflection point. The economy is growing so slowly that it wouldn't take much to push it back into recession. But if we can get beyond the fiscal cliff, he says, "the surprise will be to the upside" -- both in the economy and the stock market. Let's hope so.

Steven T. Goldberg is an investment adviser in the Washington, D.C. area.

Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Subscribe now!