The following is a summary of our recent interview with Piper Jaffray's Craig Johnson, which can be listened to on our site here or on iTunes here.
Traditionally, the months of August and September have not been kind to the stock market. So far, however, we're not seeing that pattern play out and Craig Johnson, Managing Director and Senior Technical Research Analyst at Piper Jaffray, thinks this is part of a larger bullish trend.
TINA and FOMO
Part of what’s been propelling equities higher is the fact that TINA – “there is no alternative″ – is alive and well, Johnson explained.
“If you’re an investor, you need to put your money to work,” he said. “Nobody wants to sit around with a zero rate of return.”
With financial media highlighting new all-time highs in markets, people are feeling a lot of remorse, he added, such that FOMO – “fear of missing out” – is starting to become a factor.
Also, investors are beginning to realize that overall, the market is shrinking.
“The number of shares outstanding on the S&P 500 has declined over 5 percent over the last couple years,” Johnson said. “There’s 25 percent fewer stocks today above a $25 million market cap and a $2 price than there was in 2000.”
For investors, and especially institutional investors and pension funds that need higher returns, there’s no other place to turn but quality, dividend-paying stocks. Realistically though, Johnson said, pension funds and others may have to change assumptions of 6 to 8 percent returns in their models, especially with fixed income underperforming.
Market Breadth
Small cap stocks have begun to lead the market, and this suggests that market breadth is starting to play catch up. Now that participation is finally here, though, Johnson said he thinks many are still not moving to a bullish position.
“Expanding breadth ... tells me there’s a lot of stock participation, and that perhaps there’s a lot of room for this market to continue,” he said. “This is a healthy market, healthier than a lot of people are giving it credit for.”
Many individual investors are still nervous, he noted, but are continuing to trickle back into the markets. Overall, he’s bullish into year-end, and his call for 2350 on the S&P 500 made earlier this year holds.
We’re going to see this market continue to move higher into year-end, he said, and he noted that with gains around 1.5 to 2 percent each month from here, we’ll get to his predicated level.
“From my perspective, 2350 is absolutely achievable,” Johnson said. “Money needs to go somewhere. The economy is not as bad as people think.”
Possible Land Mines
There are a few things that could change his mind, he said. For one, if interest rates fall from here, he said he thinks it would signal a change in direction and possibly further problems for the overall global economy.
Also, he continues to watch developments in Washington. The wild card, he said, is what the Fed decides to do about raising interest rates. However, if the Fed does raise in December, it wouldn’t change his forecast at all, he said.
“I think the Fed has been very patient,” he said. “I don’t think them raising rates 25 (basis points) is going to change anything in terms of my views on this market. It’s probably going to validate (my view) … that the economy is strong enough to go up 25 basis points.”
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