Investor interest has really picked back up now that Washington, D.C., has decided to get out of the way. The fiscal cliff has been largely averted, the tax rates issues are becoming far more clear, and the debt ceiling debate has been kicked down the road. It is still somewhat sad that so many retail investors are only now starting to endorse stocks as an asset class again. Our methodology for picking the DJIA levels has come within about 1% or so of the DJIA prices for the past three years now. However, one caveat should be heeded: this move higher is not likely to be in a straight line. In fact, it would only be normal to expect some violent market corrections along the way.
Here is what we have seen from outside sources. Bank of America Corp. (NYSE: BAC) recently issued its top three reasons to own stocks now. We also identified a group of stocks that analysts expected would rise by 50% to 100% or more in 2013. Credit Suisse Group (NYSE: CS) raised its expectations in select industrial stocks. We have even seen stronger calls from BofA on transportation stocks despite these being close to highs again. And what about Credit Suisse making a daring pre-earnings season call on an irresistible cyclical bottom in chip stocks?
The big move of the year has been that the market has risen at a time when Apple Inc. (NASDAQ: AAPL) has fallen out of bed and lost its status as America’s number-one stock darling. Now investors are piling back into the growth engine of Netflix Inc. (NASDAQ: NFLX), even as its credit ratings were given some caution of late.
General Electric Co. (NYSE: GE) has been well-received since its earnings report. Shares are up more than 5% since then and are up about 7% so far in the year. Caterpillar Inc. (NYSE: CAT) has risen despite woes out of China and concerns that Europe will remain weak. This industrial machine giant is up almost 10% so far in 2013. Ford Motor Co. (NYSE: F) may be down after earnings, but things are good enough that the safest American auto stock doubled its dividend. Even after a drop of 4% on Tuesday, Ford’s common stock is up more than 2% so far in 2013. Wells Fargo & Co. (NYSE: WFC) preempted the bank stocks with a dividend hike approval already in January, and we expect the same from J.P. Morgan Chase & Co. (NYSE: JPM) in February or March after the Federal Reserve reviews of the major banks.
What is interesting is that analysts have made some serious price changes to their implied 12-month price target objectives. If you look at the adjusted table at the end of this report you will see that 23 of the 30 DJIA stocks have seen their price targets lifted. With Dell Inc. (NASDAQ: DELL) now in play, analysts even expect less downside than earlier in the year at Hewlett-Packard Co. (NYSE: HPQ). Despite the woes of the 787 Dreamliner airplane from Boeing Co. (NYSE: BA), the stock is down marginally this year but the consensus analyst price target is higher than it was just a month ago. Microsoft Corp. (NASDAQ: MSFT) remains among the top DJIA-upside stocks, while consumer products giant Procter & Gamble Co. (NYSE: PG) already has hit the upside price target that analysts had at the start of 2013.
The January effect has been working in 2013. Many investors believe that the trend of January sets the trend for a whole year. The gains on Tuesday came on a day when the Consumer Confidence Index came in with the worst reading in more than a year and well under expectations. The Federal Open Market Committee (FOMC) is likely to only maintain prior easing programs, but the body language from inside the individual members of the Fed committee is pointing to the beginning of an exit strategy sooner than this “until late 2014 or early 2015″ time line that the investment community has been operating under.
Another issue is that bond yields have been rising. We have seen longer-term rates tick up close to 30 basis points over the past month or so. This comes when junk bond composite yield spreads are on the verge of going well under 500 basis points, and at a time when the rise in Treasury yields may finally be considered a norm. UBS A.G. (NYSE: UBS) in January issued an alert about which stocks would likely rise when interest rates rise.
Another word of caution is that economic readings have come in weak while the benefit has come from future expectations. The stock market is supposed to be a discounting barometer of economic sentiment for close to six months out. So what happens if companies do not live up to their earnings guidance? What if Europe’s elusive recovery does not look like it actually will take place later in the year? What if corporations do not get back on the hiring wagon? What if … what if? The risks are endless.
Should we end with the note that Marc Faber, father of the Gloom, Boom and Doom report, has warned this week that investors need to be braced for a significant sell-off in stocks again? The Volatility Index, or the VIX, a measurement of fear and nervousness on Wall St., is hovering near lows at barely above 13.0. The iPath S&P 500 VIX ST Futures ETN (NYSEMKT: VXX) was down more than 3% at $22.77 right before the close of trading on Tuesday. While stocks can remain overbought, and while the fear gauge can remain low for extended periods, the long and short is that it is currently about as cheap as it can get for investors to buy put option protection to lock in gains or to limit downside on new investments.
As far as whether analysts think that stocks are headed even higher now, 23 of the 30 DJIA stocks now have higher price targets (SEE TABLE BELOW) than they did at the first of the year. In short, analysts have raised their price target expectations on about 77% of the DJIA stocks. If we were to recalculate the new DJIA targets, it would be slightly higher than the 14,590 implied price target. Until we have all the DJIA earnings reports out and new analyst targets for the companies, we are sticking with the 14,590 price target for the DJIA in 2013. That implies about another 5% upside left in stocks with new market ammunition for investors.