Some Stock Market Thoughts for 2013: U.S. Stocks Fairly Valued, Cheaper Markets Elsewhere

Will past be prologue with Value Line’s stock market predictions?  If so, if you’re interested in stocks, you perhaps can close your eyes for the next 51 weeks.  

Last March, as the Dow was surging (again) above 13,000, I noted in a post that at the very least, it appeared that stocks were ahead of themselves based on Value Line’s predictions for the year.  At the end of 2011, it projected an average Dow of 12,900.  It has developed a regression formula that uses three variables.  These are derived from year-over-year changes in earnings, dividend and changes in corporate AAA bond rates.  Increases in earnings and dividends are, of course, positive, and rising rates are negative.  Interestingly, interest rates and dividends are both a good deal more important to this formula than earnings.  In any case, the Dow averaged 12,953 last year– exactly as predicted in December 2011 based on projections for 2012 levels of those three parameters.

In its Dec. 28, 2012 edition, Value Line projected strong earnings and dividend growth for 2013, plus a stable (i.e. ultra-low) interest rate environment.  No bears, they, on the economy or the ability of the Fed to hold the line on longer-term interest rates.  Despite these optimistic forecasts, it projects an average Dow for this year of 13,440.  Obviously, it’s basically there already.  

VL presents this chart, with upper and lower projected margin of error ranges, going back to its formation in 1929.  (I believe the formula gets adjusted over time based on empirical results.)  From the early 1980′s until 2000, the formula usually was a bit low, as stocks surged and surged some more.  Since 2001, it has been a bit optimistic in the bad years but otherwise quite accurate.  

Rather than looking at numerous ways to prospectively guess at where Mr. Market will price the Dow, I simply look at the oldest indie research house I’m aware of.  Thus I’m comfortable continuing to look abroad for the best investment opportunities.  Previously I have mentioned that value exists in the Russian and Spanish markets, with significant risk.  A more diversified investment is exemplified by WisdomTree’s ETF comprised of small-cap dividend-paying stocks in emerging markets, symbol DGS.  There are real value parameters here.  Trailing P/E is 12, price to book is 1.09, price to sales is  0.48, price to cash flow is 3.81 (averages).  Dividend yield listed in Yahoo Finance is 3.21%.  All these parameters are more attractive to investors than those for the SPY (LINK).

Especially for Americans who live and generally invest in, and may own property in, the United States, having long-term assets exposed to what could be a growing stream of dividends could be attractive both on its own merits and as a portfolio diversifier.

As always, please be aware these are not investment recommendations.  I have personal investments in DGS and various Russian ETFs, and look to buy back into Spain on a dip (the Spanish stock market has had a big run).

Addendum:  I’d also like to add that especially regarding DGS, while it is not much changed from 11 months ago and below its level of late 2010, it has had a big move since November; thus my comments were addressed not to a timing consideration but regarding its longer-term total return potential.

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