Why Dow 16,000 is back in play

A shell-shocked Wall Street responds to no taper from the Fed. Barclays calls for a 5% stock market rally by year end.

By Anthony Mirhaydari Sep 20, 2013 4:41PM

Image: Arrow Up (© Image Source/Photolibrary)It's been quite a week.

 

All because the Federal Reserve, which had been sending signals for months that it was about to pull back on its $85 billion-a-month long-term bond buying stimulus, decided at the last minute to change its mind. There would be no "taper" after all. Wall Street wasn't expecting that, with Bank of America Merrill Lynch, as I highlighted in a recent column, the only major brokerage warning that the Fed would wait.

 

While stocks are giving back some of their post-Fed gains, according to Barclays Capital, the Fed's backtracking has set the stage for big end-of-year rally. Here's why.

 

Analysts, generally, are trying to regain their bearings.

 

Credit Suisse wasn't pleased that, after months of apparently trying to prepare everyone for an-ever-so-slight reduction in the pace of new stimulus (the taper wouldn't have represented a tightening of policy, just a slowing) the Fed pulled the rug out from everyone. Not only will this make the job of actually tightening that much harder (probably won't happen until Bernanke's term ends in January) but it rattles the market's ability to trust what Fed officials imply.

 

They are also bothered by what they see as rather thin evidence to hold off on the taper. In their words:

 

"In the spirit of 'watch what they do, not what they say,' it’s hard to know now what to make of the repeated and nearly universal references by Fed officials to taper. When push came to shove, those words didn’t carry the day. It seems that relatively small shortfalls in hard data like jobs, retail sales, and housing activity -- combined with a rise in mortgage rates -- deflected the Fed from action that otherwise had been elaborately telegraphed." 

 

 

Just look at the chart above. Hard to see the jobs shortfall that spooked the Fed, isn't it?

 

Overall, in fact, the economic data has been quite strong recently. You can see this in the Citigroup Economic Surprise Index below, which measures how the data is coming in vs. analyst expectations. When the yellow line is high, as it is now, it means the data is exceeding expectations consistently.

 

 

The combination of better economic data (led by a turnaround in global manufacturing activity) and a Fed willing to keep the cheap money stimulus flowing is a potent one. Thus, the Barclays call from equity strategist Barry Knapp.

 

Knapp expects that, with the worries over the budget fight in Washington and relatively low inflation, the Fed won't taper until its December policy meeting. Furthermore, since the market has already digested the original shock to the idea of tapering overall (the May-June market swoon), he believes the lead-up to the actual taper in November and December will both be largely ignored by investors as well as overrun by the positive seasonality the market enjoys toward the end of the year.

 

Thus, with the Fed's focus on keeping rates "lower for longer" and maintaining its bond buying stimulus as long as possible, Knapp believes 1,800 on the S&P 500 ($SPX) is a reasonable valuation midpoint for the end of the year (a 5% gain from here), with a greater risk that this forecast is too conservative rather than too optimistic.

 

That would put the Dow Jones Industrial Average ($DJI) well above 16,000.

 

Of course, assuming this all works as planned, as I warned in a recent column and video segment, faster economic growth will encourage inflationary pressures to build. Sometime in 2014, the Fed will be confronted with price pressures it can no longer ignore and potentially be forced to start raising short-term interest rates.

 

When that happens, all bets are off. But for now, as long as the debt ceiling fight in Washington doesn't go nuclear, stocks could very well experience another cheap money melt-up.

 

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 


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88Comments
Sep 20, 2013 5:12PM
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Just bet on the opposite of what this guys says and you're sure to win!!
Sep 20, 2013 5:34PM
Sep 20, 2013 5:40PM
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This guy changes tunes quicker than a Jukebox.


Sep 20, 2013 5:39PM
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I have a question.  Each quarter earnings expectation are lowered.  Each year analysts tell us things will be better in the second half of the year.  Employment is improving because fewer people are on the rolls due to the fact that they gave up looking.  Groceries are very expensive.  Retail stores are struggling.  People couldn't even do much shopping when school started and they do not intend to spend much at Christmas.  Health insurance is about to skyrocket.  Tell me, how long can this go on and what will the U.S. look like when that happens.  Will we have dust bowl type lives or will the government confiscate everything and dole it out as long as it lasts.
Sep 20, 2013 5:48PM
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Anthony, you have the worst luck in the world. Once again, your two day old story hits the headlines at the worst possible time. I'm sorry man.

Sep 20, 2013 5:55PM
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What's the DOLLAR Worth:

 

It bothered me for the past few months as to the rise of the Stock Market and  all of the predictions as to the increase in the market and the market shares  until I did some research of my own.

 

The Dollar has declined from $1.00 in 1913 to buy a $1.00's worth of Goods or Services

 To  Dollar in 2009  is worth 4.6 cents

     

In 1927 there were 15,000 millionaires

In 1930 there were       513 millionaires

In 2009 there were 11 million millionaires

 

Why? Cheap money.

The Market as we see it has escalated to great heights and has created wealth beyond our wildest imaginations.

But the reality is that the Market has in fact "Devalued" itself over time due to the value  of our "Dollar".

 

So, To say the market will climb to a staggering height of  16,000 points by 2016 only shows the devaluation of the American Currency and only that. 

 

The stocks aren't worth any more, inflation demands this increase.. Like a loaf of bread costing 10cents in 1968, now we are seeing the same effect on the Stock Market.

 

INFLATION--LESS FOR MORE So,  Mr. Mirhaydari I fail to see the value of this article

 

 

Sep 20, 2013 5:49PM
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Wrong Way Tony scores again!!!!!

 

By the way Tony.  The budget fight went nuclear this afternoon.

Sep 20, 2013 6:11PM
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The name of Anthony's newsletter is called the edge because that's where anyone who listens to this boob finds themselves, teetering on the edge and probably in the hole.
Sep 20, 2013 6:11PM
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Anthony is wrong, wrong, wrong again. When he is a bear the market goes up. When he is a bull the market goes down. There are charts to justify any point, side of the market you want to take. Today he is bullish for the near term, where as all summer he was a bear, based on his charts and "analysis" of the US and global economy. Did the charts and economy change that much in 2 months? My mother always said. "liars figure and figures lie".

Sep 20, 2013 5:49PM
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Oops... and on a Friday so this Top Stocks gets to stay the weekend and get 160,000 disses.

Anthony-- put the charts away. LOOK out the window. Where are stocks going? Well it may SEEM to defy logic but reality works this way... there is no money on Main Street, no confidence on Main Street, not enough family-sustaining jobs on Main Street, no Kool Aid on Main Street, all the skilled and able people on Main Street AND... nothing but raw stupidity on Wall Street. To be ALL IN carpet bagger business platforms just as the nation's budget seizes-up, Obamacare kicks in anyway but once it does it seizes up thousands of employers and our three bodies of government pick up 2x4s and go at it... YOU have nothing, Anthony. Get some REAL skills.
Sep 20, 2013 7:12PM
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Tony you state a case that makes Helicopter Ben ready for his handcuffs. He should be FIRED and PLACED under ARREST. I saw a show where two BILLIONAIRES say Ben threw out his chance to do the RIGHT THING. They both did not understand why this IDIOT did not STOP WASTING 85 BILLION DOLLARS a MONTH?? 
Sep 20, 2013 6:19PM
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Let's see...Barclays is predicting a 5% uptick in the DOW. Peter Toz is predicting a 6% decline. I'm predicting that both will be wrong. I'm also predicting that the NY Jets will win the 2014 Super Bowl. 
Sep 20, 2013 5:39PM
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The stock market will move in the exact opposite direction than what the general consensus will dictate.

Sep 20, 2013 8:28PM
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Since this article is dead now... take a peak at how desperate Wall Street is in the latest Reuters headline... "Why stock market shouldn't worry about shutdown". Notably-- no Comments portal for us because the article is a joke! We're already very WEAK... that's why the Fed is keeping QE going. So when the only working people stop working... the nation SHUTS DOWN. Wall Street and artificially pumped up stocks TANK. Since no business platform has any assets to slow the descent, Wall Street goes kaplooey all the way to St. Louie. You ain't got squat, Wall Street, just a false front with no guts and soon... all gory.
Sep 20, 2013 8:13PM
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 Does it matter more that the market may or may not go 16,000 or that the  US economy is in the sh-t  ???.Low wages bad fundamentals low standards bad regulation bad laws .Is this what we want OUR future  OUR economy to be or can WE do BETTER????Warren Buffet  spoke and compared the US FED to a HEDGE FUND ,that is what we should put our TRUST in ???? 
Sep 20, 2013 7:11PM
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Almost as funny as reading the BBRY boards just before their announcement today.  Anthony, do you use Tarot cards or tea leaves for your prognostications?  If not, you might find them more accurate than whatever methodology you are currently using.
Sep 20, 2013 6:40PM
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Wall Street has way too many market manipulators in play for the markets to go anywhere. Besides that Wall Street doesn't understand plain English!! The Fed has said and done everything that they said they would do but the markets couldn't digest that. The government shutdown is never ever going to happen but the markets will believe its a disaster waiting to happen Things are so screwed up on Wall Street that it has become the most embarrassing financial place in the world. Idiots in charge of money!!
Sep 20, 2013 5:33PM
Sep 22, 2013 12:40PM
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Just buy stocks when the market is low.
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