Three Reasons to Buy Stocks—And One to Sell

A lot of paper comes across our desks here at NBR. Or, more accurately, a lot of emails do. On Friday, one especially caught my eye, because my colleague Jeff Cox slugged it “JPM goes all in.” You tend to take notice when a big bank makes a bold call, and JP Morgan’s Thomas Lee and Katherine Khor just have.

On Friday, they changed their year-end target for the S&P 500 to 1,719 from 1580. You might say, “How bold is that, Doofus?” Right now the S&P is trading around 1660, about 80 points above their old target and they’re only calling for an additional 60-point move.

OK, I’ll concede the point. An additional 4 percent isn’t all that much. But after the gains in stocks already this year, and given the growing chorus of investors expecting a correction, and considering that the economy isn’t growing all that fast, Lee and Khor are sticking their necks out, if only just a bit.

Here’s their reasoning.

The average gain in the fifth year of a bull market is 19 percent, they say. Right now, the S&P 500 is up about 13 percent for the year. That’s reason one to buy.

Reason two is that several big sectors of the market, notably technology, are trading at discounts to the current market price/earnings multiple. Many large-cap tech stocks, for example, are at single-digit multiples. If tech moves up to a still-below-market multiple of 14 from its current 13, Lee and Khor see it adding 27 points to the S&P by year end. They apply similar logic to healthcare and financials.

Reason three is that household wealth has returned to pre-recession levels, at $36 trillion. Rising house and stock-market values are behind the move. What it means is that consumers, feeling stronger financially, will spend more. Lee and Khor expect $450 billion more in spending in 2014-2015. That, by itself, should help lift stock prices.

So there are the three reasons to buy. The reason to sell—or, as Lee and Khor put it, “what could go wrong”—is that the Federal Reserve spoils the party or the market loses confidence in Bernanke & Co.

There’s increasing chatter, for instance, from Fed officials and investors alike, that the era of easy money may be ending soon. Just Thursday, Fed Governor John Williams suggested that the Fed could begin tapering off its bond purchases as early as this summer. That stung the market late in the day Thursday. He’s far from the first to say this; in fact, he’d said much the same on prior occasions. If the easy-money cocktails stop flowing, or if interest rates start to rise in anticipation of that or of inflation, money won’t pour into equities the way it has been. Risk will get repriced, and stocks could stall—or fall.

A trader I respect told me Thursday that the talk in his shop lately is that the Fed “smells something,” and is going to turn from offense to defense soon. It was just his hunch, his “Spidey-sense.” But he’s backed it up by becoming net short in his trading positions. It’s been an expensive stance to maintain in the past few months. But at some point he may be right.

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  1. Tom Hannah says:

    As an average really small time investor I am just following the herd!! Where does one go as an alternative to the market? Bank and money market interest is in the tank, bonds are played out the the bond funds owners are running for the exits! When you hear the talking heads on cable TV you realize they are directing their comments to the people who already have money. Where does the 78 year old man and his wife put what they have left to work besides the market???

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