Record highs but more room to run for stocks

With the equity markets pushing through to new highs, money managers are already banking on how far this rally can run. “People don't often think of 13 as being a lucky number, but 2013 is going to be a good year for investors,” said Philip Tasho, chief investment officer at Tamro Capital Partners LLC. Mr. Tasho added that, unlike the previous peak for stocks in October 2007, companies are generally in good shape and the macroeconomic environment is ideal for an extended bull run for equities. “The economic backdrop is slower now than it was in 2007, but the valuation story is much stronger,” he said. “The more challenging economic environment has muted some of the revenue growth, but corporate balance sheets are now healthier than they have been in a generation, which is why the underpinning here is quite attractive for Dow-type stocks.” The Dow Jones Industrial Average gained 125 points yesterday to close at a new all-time high of 14,253.77, representing a 118% gain from the March 2009 bottom during the financial crisis. The Dow's rally continued into this morning, tacking on another 30 points by midday. While the Dow is a closely watched and much-quoted equity benchmark, it comprises just 30 large companies. A better illustration of the strength of the overall equity market can be found by looking beyond the Dow to broader indexes such as the S&P 500 and Russell 2000 Index. The Russell 2000, which is represented by smaller companies, reached its all-time high in January. The S&P 500, which has gained almost 8% from the start of the year, is within 2 percentage points from an all-time high. “People are focused on the Dow, but this is broad-based, and not just large-caps leading the charge,” said Paul Hogan, portfolio manager at Fenimore Asset Management. “It is significant because it's another positive data point that will generate positive headlines about the market, and that helps to improve investor sentiment,” he added. Like a lot of other money managers and analysts, Mr. Hogan is focused on the relative value of equities and generally improving economic data to support a continued market run. For example, the price-to-earnings ratio of the S&P 500 is 13.5, which compares with historical norms of around 15. “There is a lot of positive economic news out there in terms of housing, autos, industrial production, and even transports are doing well,” Mr. Hogan said. “All those numbers are improving, but we still have a long way to go from here.” Through yesterday, the Dow was up 8.8% from the start of the year and 11.7% over the past 12 months. “The market is at an all-time high, but it's not technically overvalued,” said Gene Peroni, senior vice president of equity research at Advisors Asset Management Inc. “Instead of the kinds of head winds we were facing in October 2007, it seems like the market is now benefitting from tail winds,” he added. “I can't remember a time in my career when the Fed has been so transparent about what they're going to do. I think the Dow could get to 15,000 over the next three to seven months.”