Deutsche Bank’s Five Simple Rules for When to Buy Stocks

July 22, 2014 by Lee Jackson

bearLast week stock market bubble-mania was rampant. It seemed as though every Wall Street website, network, magazine, TV show, pundit, talking head, you name it, was screaming that the market had hit rarefied air and we were in a bubble the likes of the tech world at the end of the last century. They also warned that a crash could be sizable and was imminent.

For some background information, from the closing low of the market on March 9, 2009, at 676.53 on the S&P 500 to the recent closing high of 1,985, the market has risen an astonishing 193%. An incredible feat to say the least. However, much of that number was just filling in the huge hole we dug on the way to 676 in 2008 and 2009. Twice, in 2000 and in 2007, the S&P 500 approached the 1,600 level on the index, only to fall back and fall hard. When we finally broke out above the 1,600 level in May of last year, we officially entered into a secular bull market.

There are numerous reasons for the strong rally. First stocks were just too darn cheap to ignore. Many top tech, bank, auto and housing stocks were trading in the single digits. Interest rates were lowered and kept at levels not seen since the 1950s, and they are still there, with both the 10-year and 30-year Treasury debt hitting yield lows not seen since last summer. Lastly, the economy finally started to roll again, and companies started to deleverage and show outstanding earnings growth as the U.S. and global consumer finally started to spend again.

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So are we really in a bubble? Will there be a mammoth stock sell-off of 30% or more? A new equity strategy report from the top-notch team at Deutsche Bank says the answer is probably no, despite the fact that a fall correction is a possibility. In fact, they say that unless the August 1 jobs report brings an uptick in U.S. labor force participation, they are likely to maintain a tactically cautious stance heading into autumn. Midterm election years have often seen selling prior to the election.

With that in mind, the Deutsche Bank analysts are very positive on the possibility of the S&P topping the 2,000 mark, and they feel that on a total 2015 earnings of $125 for the index members, a 16 EPS multiple would be tacked on. From a historical standpoint that is not unheard of. In fact, from 1960 to 2013 the S&P traded at an average of 16 times earnings. From 1985 to 2013, it traded even higher at 17.6 times earnings.

What the team at Deutsche Bank suggests is to follow their simple rules for when to buy stocks. They say every time you hear the old bear growls from Wall Street and the assorted other financial news outlets, it is a good chance that a buying opportunity is right in front of investors. Here are the five specific growls they say to be on the lookout for.

1) Analysts and pundits of all varieties talking about “unsustainable margins.” It is sort of a catch-all phrase that is very hard to quantify, but it is often used as an excuse.

2) When you hear talk about the overextended price-to-earnings (P/E) ratio. Market caps have exploded to unsustainable levels. Gross domestic product (GDP) is horrible. Any basic reason for the bearish camp to point at these may be a time to buy. GDP was horrible in the first quarter, thanks to one of the bitterest winters in years. Second quarter is expected to be better, and the last half of the year could surprise to the upside.

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3) “The U.S. is not done deleveraging.” The fact of the matter is that U.S. corporations and consumers have spent the better part of five years getting their fiscal houses in better shape. Studies show that the average age of cars in the United States, as well as other major big-ticket durable goods items, is at the oldest they have been in decades.

4) “China is a credit bubble.” Many sophisticated and savvy investors have been taken to the woodshed over the years trying to predict when China would collapse. Usually it is the same credit bubble call. China, while certainly subject to ups and downs, is quickly becoming one of the world’s largest consumer nations. That is fueling record imports to China from around the world. They do and will have issues, but not the kind that are likely to blow up everything at once.

5) “The Federal Reserve has fueled this entire rally with cheap money and low rates.” While there is no question that low interest rates have helped the stock market rebound, there is also no ambiguity surrounding the Fed’s plans. They are cutting the quantitative easing month by month and ending it in the fall. In addition, the market is pretty sure that by this time next year, the Fed Funds rate will start to be lifted. While the increases will be slow and measured, they will be a reality and are expected.

Remember, the overall tone and targets at Deutsche Bank are lower than most of Wall Street. In fact, their 2014 year-end target is 1,850, which would be a sizable leg down from where we are now. Their advice to buy stocks if you hear the old bear growls does make good sense, and investors may want to keep them handy for future reference.

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