30% Upside for Stocks [CHARTS]
After a dismal December, stocks are off and running this January at the fastest pace in 32 years.
But you’d never know it based on the cautionary headlines in the financial press.
I can’t count the number of stories I’ve seen recently containing phrases like “dead-cat bounce” or “bear market rally.”
Of course, these cautionary tales all have the same ending. Stocks roll over as the “fill in the blank” disaster du jour strikes fear into the hearts of investors
After more than 30 years in this business… I can tell you one golden rule of thumb: Fear moves stock prices higher, especially excessive fear.
“Attempt to be greedy when others are fearful.”
— Warren Buffett
With that in mind today I’m going to share two charts with you. The first shows us the pervasive pessimism in stocks during December’s lows.
The other chart cuts through the market noise and shows us the big picture for the market.
It will also give us a glimpse at what may be in store for stocks over the next several years.
Let’s dive right in, starting first with FEAR…
Above is the quintessential picture of fear in the market. It’s the American Association of Individual Investors (i.e., mom and pop) survey of bearish sentiment.
As you can see, bearish sentiment reached multiyear highs in December 2018. But as you also can see, the extreme spikes in bearish sentiment typically correspond with market bottoms and the sizeable rallies that often follow.
This pervasive pessimism will continue to fuel the current rally… BUT a word of caution, too: Stocks are very overbought right now after this vertical move. I expect a brief pullback before the market moves much higher. But when all is said and done the S&P 500 could exceed 2,700 before the rally completely exhausts itself.
Then after this extended run-up I again expect a pullback. But this again presents another great buying opportunity.
How Good an Opportunity?
Glad you asked. That brings me to my next chart, which clearly shows why you should be greedy right now:
This graphic, courtesy of JAG Capital Management, shows the long-term trend in stocks. The chart stretches all the way back to 1925 and displays the S&P 500 Index adjusted for inflation over nearly a century.
A true big-picture view.
What jumps right out at you are periods of volatile up and down swings, followed by recognizable periods of consistent uptrends in stocks.
Over the entire time frame, stocks gained about 7% per year. But the key is buying at the lower end of the uptrend line. This is when your upside potential is greatest. The second-best time to buy is at the center trendline.
In other words, when most investors are fearful, it pays to be greedy, proving Warren Buffett’s point!
The last time stocks hit the lower end of the trend was 2009. Since then stocks have gained 300%. An incredible 15% per year!
That’s much better than the average of 7% annualized. However, visits to the lower boundary don’t happen very often.
In fact, the lower end of the trend has been touched only five times in nearly 100 years.
Buying stocks at the center line produces above-average gains for investors and happens far more often than you’d think.
Where do markets stand today?
Just below the center line for the first time in about three years. From here stocks should appreciate an above-average 8.5% per year over the next five years.
And if stocks make it back to the upper end of that trendline, then hold on to your hat.
You’ll be looking at annualized gains of about 30% over the next several years.
But what if stocks fall back to the low end again?
In the worst-case scenario, stocks lose about 5.8% per year.
But that simply means markets today have 30% potential upside and only 5.8% downside, with a baseline gain of 8.5% per year.
Now that’s what I call an excellent reward-to-risk ratio!
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
Editor’s note: THIS IS YOUR LAST CHANCE… This comes offline TONIGHT.
And because this video could change the rest of your life… you need to set aside 90 seconds to watch it right away.