Blog : Stocks Still the Only Game in Town

by Ed Zwirn on September 15th, 2014

The many warnings of a correction notwithstanding, stocks continue to be the best deal in town, or at least that's what the analysts are saying. In separate articles citing separate analysts over the past two business days, the smart guys are predicting that the Standard & Poor's 500 will hit 2,390 by the end of 2015. If this prediction holds true, this blue chip index, which is presently quoted at 1,685, will have gained 20% in about 15 months, for an annualized return, not counting dividends of about 16%.

Piper Jaffray's Craig Johnson relies on charts when making his predictions. "As market technicians we often use history as a guide to understanding the current market environment," he was quoted by CNBC on Friday as saying, explaining that he used a chart of the S&P 500 from 1933 to 1965 to come up with his prediction of a 20% upside. "When I look at the chart, it tells me that we are in a new secular bull market."

In today's newsfeed, we hear from another chart reader who comes up with a bullish outlook for the S&P 500. After a mini-pullback, says Dragonfly Capital's Greg Harmon, in which the stocks in the index treading water for the next few months, the index will come up to a high of 2,390 by the end of next year.

Predictions of a 20% move to the upside may seem fanciful at this point, with the bull market aging and stocks already at historically high valuations, and Messrs. Johnson and Harmon may or may not have plagiarized each other, but there is solid ground for optimism all the same.

This is because U.S. equity markets continue to be the only place that investors can hope to score a decent return. Bond market investments don't hold a candle to investment in stocks. Thanks in large part to the availability of easy money courtesy of the U.S. Federal Reserve, government debt and corporate investment grade debt offer yields too low to mention in polite company. Even junk bond debt, the highest debt in the risk ladder that anyone wants to touch, is yielding only about 6.5% to average maturity.

And getting to penny stocks: The small-cap Russell 2000, albeit currently languishing, has risen about 9% over the past year, making even the most challenged part of the current market dynamic a winner, at least in comparison to junk debt.

Whether or not these trends continue may be up to question, but with stocks investors continue to correctly perceive a greater chance for enrichment. Keep in mind that the predictions for stock market greatness, whether valid or not, echo the sentiment of investors and at the same time contribute to it.

These predictions hint at the possibility of greater things. If you can make 16% a year by investing randomly in an index consisting of the 500 largest corporate entities in the U.S., the logic goes, imagine how much you can make by picking the right S&P 500 member and buying and selling it at the right time. Multiply this sentiment exponentially as you increase risk, and you get the idea of the possibilities for a penny stock investor who acts wisely on information and gets in on the next best thing.

This continued support for risk taking is the direct result of Fed policy, and this helps explain both why the Fed's Thursday announcement is both eagerly anticipated and should be ignored, whatever it says. Nobody expects an actual tightening move this time around, but players are pretty much evenly divided over whether Yellen and company will drop its guidance that rate hikes won't occur until a "considerable time" following the end of Quantitative Easing in October.

The bull market, for better or worse, is understandably sensitive to the possibility that debt yields could rise enough to threaten the predominance of stocks. But the tweaking that may or may not occur Thursday is hardly sufficient to threaten this predominance. Real interest rate increases will only come when the Fed perceives that there are virtually no threats to the upside for the U.S. economy. This not being the case at this point, due to both internal and external reasons any change in written Fed guidance smack of what some traders call "jawboning," an attempt to take some wind out of a market without actually taking any concrete action.

The upshot for penny stock investors: The U.S. and global economies do face risks, and these risks, which are (unfortunately) not all economic, do threaten to cause short-term swings. But the paradigm remains: Nothing is hotter than a hot penny stock at the moment. The risks may be great but for "a considerable time" there may be nowhere else to go to try to score big.