Wall Street has been debating the huge run-up in the Dow Jones Industrial Average. Was March the beginning of a huge rally that will take the market to new highs? Have we witnessed the proverbial "dead-cat bounce?" The prognosticators have been unsure, uncertain and uncommittal about what they see coming next... So let me make it clear where I stand: We are in the beginning of a new bull market that will carry us to 10,000 on the Dow by year's-end - and new highs within a couple of years. Yes, the recovery will be volatile. But now is the time to buy, despite the big run up. No doubt there's plenty of bad news out there - rising unemployment with no end in sight, threatened tax increases on capital gains and dividends, anemic corporate profits, commercial real-estate insolvency, federal deficits, continued threats from the Middle East and Afghanistan, the specter of inflation and high interest rates among others...
This list goes on and on. But as the old saying goes, "Wall Street climbs a wall of worry." It's all for naught - and I encourage you to look past these sideshows and distractions. I'm convinced the stock market is headed higher - a lot higher. I'll share my reasoning and tell you why Jeremy Siegel feels the same way. Three Reasons the Dow is Going Up Over the past few months, three things have been sticking out to me like huge blinking aircraft landing signals. Here's why we're going to keep moving up.. The Fed. Bernanke and the Federal Reserve are pulling out all the stops to stimulate the economy. Since September 2008, the money supply (M2) has been growing at an incredible 13% rate, one of the highest in the post-World War II period. As Milton Friedman has demonstrated time and time again, after a lag of between six and nine months an easy money policy will cause a sharp recovery in the economy and stocks. Economists call it the "Friedman Effect." Mortgage support. The Obama administration has been working hard at bailing out all the unstable banks, bad mortgages and bad assets in the economy through massive deficit spending. Essentially, the government policy is putting a floor under the residential real estate market, which will keep it from collapsing any further. History sides with the bulls. Last month, I had dinner with Jeremy Siegel, professor of economics at the Wharton School and author of the bestseller "Stocks for the Long Run." He is a firm believer in looking at historical trends, something that many investors and Wall Street analysts have forgotten. And right now, the trend favors the bulls. Well, guess what? The lag is over, and the "Friedman Effect" is taking full effect. We can expect higher stock prices and a recovery in the economy by year-end. And as a result of the administration's efforts, housing sales are on the rise and real estate prices are stabilizing. It's why I'm so interested in real estate lately. Take a look at my last column, "Real Estate: The Buy of the Century." Adding more fuel to my position, when I sat down with Wharton's Wizard he showed me an interesting long-term chart of the S&P 500 Index. The Wizard of Wharton's Long-Term Outlook You'll note that every time the market hit the bottom of his long-term chart, it rallied - sharply. And that's exactly where it was in late February when I met with Professor Siegel - at the bottom. Sure enough, in early March Wall Street rallied - and it hasn't looked back. It's now up 30% from its lows. Between you and me, he called the exact bottom of the stock market within weeks. (Of course, so did a few of our analysts as well.) How far up can it go? I asked this precise question to Professor Siegel last month. He told me that he has just completed a study of how well stocks do after a major crash like the one we just experienced (falling 50% from its highs). His conclusion was pretty striking: After a major bear market, stocks on average rebound 24% the first year of recovery. And just as nice, the average annual return over the next five years is 18%. Since the Dow was around 8,300 at the first of the year, it could climb back to 10,000 by year-end. (And 18,000 by 2013.) We could comfortably hit these numbers with an additional 19% gain. Although many believe the "easy money" has been made - and they may be right - the market will still offer plenty of profitable opportunities in the coming months. It'll be volatile, but it's certainly not too late to get aboard. The article above was taken from an investment community in the U.S. enjoy...
