My view on the state of the stock market is that the S&P 500 Index will hit 1,500 this year. That’s about a 15% gain from the current level and would represent a gain of about 20% for the entire year. The stock market’s due for a break, but my economic analysis shows that investor sentiment is strong enough to carry the market higher throughout the year. The earnings are there. The growth is there. And we shouldn’t forget that stock prices tend to lead the economy.
My stock market advice now is not to take too much action. While the market is not overvalued by any means, it is fairly valued and a good portion of the broader market is trading right at the 52-week high. So, if you like to buy low and sell high like I do, this makes that investment strategy more difficult. You have to have a lot of patience and a lot of self control to wait for only the most attractive opportunities to bet on.
One area of the stock market that continues to be the most attractive for speculators in micro-cap stocks is mining. I keep harping on the subject. There are great opportunities in junior mining stocks right now, even with the spot price of gold and silver trading at record highs. Like I’ve written before, the key drivers of mining shares are new discoveries and the underlying spot price of the precious metal. It’s a tough business to be a speculator in this industry, but, then again, it isn’t easy making money in other sectors either.
When you’re in a rising commodity price cycle, not surprisingly it pays to allocate more of your portfolio to this area. A lot of individual investors have traditionally focused on the technology sector to find growth, but this isn’t necessary in the current environment. With gold and silver prices trading where they are now, even the fastest growing micro-cap technology company can’t generate the same kind of earnings growth compared to a mining company with increasing production. The business model is just that good in the resource sector right now.
History suggests that commodity price cycles always end, so, in a sense, speculators have to milk the cow while it lasts. But, I find it difficult to imagine a big retreat in precious metal prices in the near and medium terms. Developed economies are still in recovery mode and, with the huge increase in global money supply, the argument against inflation is pretty thin.
Even oil and gas stocks are seeing a marked improvement in their trading action, and natural gas is still in the doldrums. With declining production on a global basis, I also find it difficult to imagine WTI oil any lower than $85.00 a barrel.
The action in the broader market is stronger than most people think. Investors want to be buyers of stocks because there is no other place to invest with the same kind of near-term upside. To me, 1,500 on the S&P 500 seems very reasonable.