Stupidly Predicting the Stock Market (Fools Rush in When Angels Dare to Sell)

If you want to look foolish, predict the stock market. Given I've just tweeted a jobs report prediction (over 300k for October, to be reported in early November), I may as well set myself up for a full prognostication pratfall and add the stock market as well.

The S&P 500 is up only 1.4% from the start of the year. For all the talk of an over-priced market, that's not exactly indicative of a bubble. And if you go back to pre-dot.com bubble, to Jan 1997, the annual return since then works out to fairly pedestrian 5.5%. Again, that's not exactly outrageous. From a long-term perspective, the market has plenty of room to rise.

Secondly, the Eurozone has serious structural issues. It is unlikely to hit strong growth in less than 1 to 5 years, so it won't be much competition for investment dollars.

Emerging markets are due to rise again - given their stage of development they could probably put capital to the most productive use - but it's going to be hard for them to begin exporting at the proper rate when southern Europe and the US are trying to work down their current account deficits.

Bonds are risky investment alternatives. The Fed can't lower interest rates any lower and with unemployment now under 6% it's just a matter of time before they start raising rates. Worse, the global economy is still flirting with deflation, something that would make nominal bond rates fall. Both - or either - of these events will just cause bond prices to fall.

The smart money has left housing now that prices made a big shift upwards last year. Mortgage loan requirements are still harder to get than during the mid-aughts boom and likely will be for years. Home prices should edge up for homeowners, which is nice, but it's not obvious they'll rise sharply enough to attract a lot of investors.

Commodities will be hurt by stagnating demand in Europe. Oil prices are already falling and prices at the pump promise to edge close to $3 by year end. Gold is less alluring as voices like Glen Beck's are no longer able to point to record deficits as (their) proof that gold will soon be the only safe refuge.

All that to say that American companies - who have proven their ability to generate record profits even during a weak recovery much less what now (in the States) promises to be a strong recovery - are probably the only serious investment alternative. It would be lovely if stock prices were lower but I think we are in a period in which returns to capital are simply lower. Part ownership in a company through the stock market will probably be the best investment alternative we'll have for a significant part of a portfolio.

So, I'd look for a sharp rise in the market before year end. I think between now and December 31, the market could easily rise 5% or more. The result will be a fairly unimpressive year but it will have gotten their in spectacularly volatile fashion.