With the DOW hitting a new record high, a lot of investors are wondering if there is still additional upside to stocks at the current time.
The economy continues to improve, and corporate earnings have been growing, albeit slowly. The fourth quarter earnings season is coming to close, and generally speaking it was a very upbeat earnings season.
So far we have seen 69% of the companies who have reported earnings post better than expected numbers. In addition, 64% of the companies reporting posted higher sales than were expected. To put these numbers into perspective, the historical average for both of these events is 62%.
The strength we are seeing in the current earnings season has boosted investor confidence, but not everyone is so optimistic that the good times are going to last on Wall Street. Reports are starting to surface that big investors and hedge fund managers are taking the opposite view on the market, and selling.
It is easy to understand why these large investors are taking a bearish view on the market. Stocks have been rising to new levels despite all of the troubles that remain in the economy.
In order to make an educated guess on the future of the stock market, it is important to try to understand what has been driving the recent gains. As we have already noted, earnings and sales have been strong, but is this really the reason why the DOW is setting new records, or the reason something else?
A lot of market bears believe that the recent strength is more a result of government intervention. In order to keep the economy in recovery, the Federal Reserve has been keeping interest rates near zero, and an aggressive bond-buying policy.
Federal Reserve chairman recently defended the central bank's policy of bond-buying, and reiterated his intention to continue buying $85 billion a month of long term Treasury and mortgage debt. As long as the Federal Reserve continues down the road of its current easing, the market will move higher, there is no question about that, but what happens when it changes its policy?
The Federal Reserve finds itself in a tricky situation. It has the responsibility to help keep the market trading higher, but it risks creating a situation that could lead to another big collapse in the market.
So who is right? Is it time to be buying stocks, or hedging against the market?
In my view, there is still money to be made in the market. Despite its recent run, stocks are still priced relatively cheaply. The S&P 500 is currently trading at 15 times last year's earnings, which is below the 18.8 P/E ratio that we have seen since 1998.
While there is still money to be made, investors do need to be wary. There are hurdles that the market is going to face, and if investors are not careful to pick stocks with strong underlying fundamentals there could be problems.