Saturday, January 26, 2013

A Bullish Argument for U.S. Stocks

The Bullish Case of U.S. Stocks in 2013 makes the case that U.S. stocks are undervalued based on historical measures and that returning historic averages would lift the stocks significantly.   In addition, the current bull market is only the 9th longest since 1928 and sentiment indicators are still 10% below historical norms.  Simply, if the market simply returns to the average historical valuation, 2013 will be a very good year for the market.

To me, this  argument is based on the principle of regression to the mean.  Specifically, over long periods of time, the individual values will tend to move towards the long term average.  This principle doesn't exclude that there will be significant deviation from the mean in the short term.

So the bet is whether stocks will move back towards long term averages in 2013, or whether stocks will continue to deviate.   Based on equity mutual fund inflows and a sampling of financial bloggers' 2012 positive investment results, I believe that stocks will gravitate towards the historical averages in 2013 and sideline money is reinvested in stocks.  Of course, a significant event, e.g. sovereign debt default in Europe, could create a significant deviation again

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

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