Weekly Market Comments: Dow 38,000 what a nut

Some people say the craziest things to grab headlines. Jeff Hirsch the Editor of the Stock Almanac made such a prediction calling for Dow 38,000 by 2025.

What's interesting about the prediction isn't the prediction itself.

It's the reaction it received. It was met worldwide with skepticism, disbelief and contempt. This is the mental state of affairs investors have about investing.

As unbelievable as the number seems on face value it's really quite possible. To have a Dow at 38,000 by 2025 we would need an 8.8% annual return. It wasn't that long ago when we all talked about the equity markets generating 10% per year as a rule of thumb. By the way, that would put the Dow at 45,000 in 2025.

In another intriguing analysis by Bespoke, they spotted a very interesting trend with yield curves. I'll paraphrase some of their analysis.

Since April 2010, the slope of the yield curve on Treasuries has gone from more than a 1.5 standard deviation above its long-term average to less than one standard deviation above its long-term average. Since 1962, there have only been ten other periods where the yield curve has seen this swift a decline from such high levels.

"In those ten periods, the S&P 500 has averaged a gain of 3.99% during the initial six-month decline in the yield curve. Over the following three months, the S&P 500 has averaged a gain of 5.21% with no occurrences of negative returns. Six months later, the S&P 500 averages a gain of 8.65% with positive returns in eight out of ten periods. Finally, over the next year the S&P 500 has seen an average gain of 17.97% with gains 80% of the time."

With bond yields so low it's not hard to believe investors choose stocks over bonds in hopes of higher returns.

On to Don Robinson's comments on Friday which were not all that uplifting and positive for the next few years. You can find my summary on Twitter under PHCOAdvisors. His forecast calls for very muted returns in stocks with sub-par growth in GDP over the next few years. While I agree with many of his thoughts, particularly around the absence of inflation, a slight bias toward deflation and persistent unemployment, I do think we will find positive growth periods in equities driven by a few trends.

Technology will drive innovation and in this environment drive efficiencies and productivity. Technology will fill the gap that the consumer can’t. If the consumer can't drive profits for companies, innovation, efficiency and optimization will.

Health Care and Longer Living- with a global baby boomer generation entering retirement there should be plenty of opportunities to profit from the most highly educated, wealthiest and largest population cluster in the history of the world.

Higher Standards of Living- regardless of what may be said to the media; the world wants our living standards, from quality of food to construction, media and entertainment. We will continue to set the benchmark and those in emerging markets will aspire to attain our level of abundance.

My point is human instinct and animal spirits (Keynes) will drive the profit motive and help fuel equities forward. As I have suggested several times in the past equity returns will be very uneven across sectors and segments. Rising tides will not lift all boats and selection matters most in this type of market.

In the very near term my themes continue to be:

German Exporters-with a weak Euro they will benefit Technology especially export driven Media (both print and television.) Emerging Markets Yield, Yield, Yield (preferred's, very selective bonds.)

I also like the directional approach Lockwood suggested - long/short and market neutral.

The new generation of Phillips Advisors has convinced me to take this step and it proves to be a fascinating and great way to share relevant information. You can see some of my favorite articles and current ideas on Twitter by following us at PHCOAdvisors.