Three Reasons to Buy the Market

Written by GSCR Staff   
Wednesday, 26 December 2012 10:10

We rarely talk about buying the market but there are 3 reasons why investors need to think that way right now when buying stocks.

First, investors should typically stay invested for decent stretches of time because of the nature of stock trading. If you do not have exposure, you will miss the big runs. It is hard to do, especially after getting clobbered. Here is a great story on Bloomberg that came out the other day that describes how retail investors have lost out on $200 billion in stock gains the last few years. (Of course, it omits the big losses in the micro cap space, but I digress.)

http://www.bloomberg.com/news/2012-12-24/americans-miss-200-billion-abandoning-stocks.html

Second, while 2012 was largely a year defined by limited top-line growth and operating efficiency gains, 2013 will likely elicit higher profit on an EPS basis for many companies. This will be driven by a slightly better economic outlook, turnaround stories, big cash positions, better sales growth, and fewer shares outstanding due to a plethora of stock buybacks.

Third, as concerns over the fiscal cliff disappear, and the January Effect arrives, the market is primed to move higher. Moreover, as the attention then swings to EPS growth rates for 2013 and beyond, we could even see P/E and other valuation multiple expansion in 1H13.

The overriding question will become, when will the gravy train end? Until the market ceases to give investors no choice but to take on risk for returns, we think it will be in good shape. Plus, as retail investors return, that will give one big, final push higher. Maybe that will be the signal for a pause in the market? We think so.

Disclosure: Goldman Small Cap Research analysts are neither long nor short the stock mentioned in this blog but may elect to purchase the stock(s) within the next 48 hours.

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