He didn’t enter the year as a roaring bull, but market veteran Jack Ablin is finding reasons to get more positive on stocks.
On CNBC’s “Futures Now” last week, the Cresset Wealth Advisors co-founder and chief investment officer listed five indicators that support the case for new record highs, and a positive year overall for the market. He pointed out he didn’t come up with the indicator list overnight, but after publishing a book on it about ten years ago called “Reading Minds and Markets.”
1. Valuation
Ablin acknowledged that from a historical perspective, stocks look expensive. But based on forward price-earnings ratios, he pointed out stocks look relatively cheap.
“Earnings have grown by say 26 percent so far this year – the S&P 500 Index [is] up only about six percent,” Ablin said Thursday.
“I think investors are looking at this going ‘this 26 percent growth rate isn’t going to last forever, so we’re not going to buy in completely,'” he said. “And, for that reason there is a little bit of a discount going on.”
2. Economic Backdrop
Ablin sees better than expected economic numbers, including U.S. economic growth exceeding 4 percent, as another big reason for investors to consider staying in stocks.
“We’re seeing positive surprises in the business cycle, retail and, of course, the jobs market,” he said. “We are still beating economists’ forecasts, and the economic backdrop is still conducive for risk-taking.”
3. Liquidity
Ablin had expected liquidity, the amount of money to borrow, spend and invest, to break down — but it never did. Instead, it has actually improved.
“I thought was going to go negative about two months ago, but, remarkably, largely on the back of these earnings reports, I suppose, liquidity reversed course. We’re actually square back in the middle of easy money again,” Ablin said.
He views slowing liquidity as an early warning sign of market trouble — giving the example of the indicator going negative four quarters before the 2008 financial crisis erupted.
4. Investor Psychology
When it comes to how investors feel about the market, Ablin gets concerned when they’re “massively bullish” because disappointment can come pretty easily. That’s not the case right now, he said.
“Investors are skeptical. It’s not an extreme,” the investor said. “They’re roughly in the second quartile of their bullish-bearish range towards the bearish side. So, all things go that way.”
5. Momentum
According to Ablin, solid momentum should give investors the confidence to stay in the market, despite jitters over geopolitical headwinds such as the Turkey, the trade wars and rising interest rates.
“A market in motion tends to stay in motion unless otherwise acted upon. You look at something just as simple as the 200-day moving average,” he said. “We really haven’t even crossed below that even with two or three downdrafts this year. So, all in all, momentum signals suggest stay in this risk on position for now.”
