Chris’ note: Coronavirus fears are starting to take their toll on stocks. Yesterday, the Dow dropped 3.6%. The S&P 500 hit a two-month low. And stocks are falling again as I write.
It’s easy to panic when something like this happens. But colleague Jason Bodner says that’s a big mistake. Jason is a former Wall Street trader who heads up our Palm Beach Trader advisory. He’s a true market insider with a unique perspective on what really matters for stock prices.
Jason says there will no doubt be some bumps in the road ahead due to virus fears. But as he reveals below, there are three important reasons why now is actually a great time to be invested in U.S. stocks.
Now, over to Jason…
We’re in the greatest bull market in history. At nearly 11 years old, it’s the longest bull run ever for U.S. stocks.
Now, some people believe we’re due for a crash. But they’re wrong.
I can tell you with authority that it’s only going to get better. In fact, the market just got an additional boost to keep rocketing higher.
Two weeks ago, the White House leaked a proposal of tax cuts that would incentivize Americans to invest in stocks.
Under the plan, some household income would be treated as tax-free for investing outside a traditional 401(k). A household earning up to $200,000 could invest $10,000 of that income in stocks – tax-free.
You see, a recession is the only thing likely to prevent President Trump from winning another term. So he’s trying to pull out all the stops to keep the stock market chugging higher.
I spent nearly 20 years on Wall Street putting together trades for some of the world’s richest investors. And I haven’t before seen anything so bullish for stocks…
The S&P 500 is a good stand-in for the U.S. stock market. It could reach 4,500 points before the bull market’s over. That’s 42% higher from here.
But even if this new proposal doesn’t pass, this epic bull run still has plenty of runway in front of it.
Today, I’ll share with you three reasons why. Once you read them, you’ll see that it would be a mistake not to invest in stocks right now…
I don’t make crystal-ball predictions. I look at data and let that guide me. And the data is indisputable: Over the last century, the U.S. stock market has climbed higher.
Stocks have outperformed U.S. Treasurys, gold, and nearly every other asset class over the past 100 years.
Until I see otherwise, your best chance of making money over time as an investor is in the stock market.
Throw in President Trump’s new tax incentives for ordinary Americans to buy stocks… and it’s a no-brainer. The stock market will climb even higher.
But past performance doesn’t guarantee future results. So I need to see more…
When interest rates are low, as they are now, you earn nothing on bonds or your savings in the bank. So you have to look elsewhere for income.
And the hunt for income is on, since rates will likely remain low in 2020. In fact, traders are now pricing in a rate cut in June. Here’s why that’s important…
The dividend yield on the S&P 500 is 1.9%. But the yield on the 10-year Treasury note is 1.3%. So you’re earning more income in stocks than on the benchmark U.S. government bond.
And that doesn’t even account for the difference in how these two streams of income are taxed. Let me explain…
The government taxes dividends at 23.8%. That’s because the government taxes dividend income in the same way it taxes long-term capital gains. But the government taxes bond income as ordinary income. And that means bond income carries the maximum federal tax rate of 40.8%.
So if you’re an investor looking for income, you’ll end up with more money in your pocket with stocks at current yields. It’s all in the table below.
| INVESTMENT | AMOUNT INVESTED | YIELD | MAX TAX RATE |
RETURN BEFORE TAX |
TAX OWED |
RETURN AFTER TAX |
| 10-YEAR TREASURY | $100 | 1.3% | 40.8% | $1.30 | $0.53 | $0.77 |
| S&P 500 | $100 | 1.9% | 23.8% | $1.90 | $0.45 | $1.45 |
| Advantage of owning stocks over bonds | 88% | |||||
When it comes to post-tax income, stocks are clearly the better place to be.
And if you add in the tax incentives the White House is proposing, why would you buy anything else?
Finally, the market is much more robust than the negative headlines suggest.
Investors are panicking over coronavirus news. That’s understandable. But companies are still showing stellar growth.
Nearly 80% of S&P 500 companies have reported earnings for the fourth quarter of 2019. According to figures from FactSet…
-
71% of those have reported positive earnings surprises, and 67% have reported positive revenue surprises.
-
Stock buybacks have remained strong (more than $770 billion in 2019).
These facts are bullish for stocks. And the Main Street economy is chugging along, too…
The jobless rate is at 3.6%. That’s near its 50-year low. And wages are up 3.1% over the past year.
It’s hard to find a reason to be bearish with numbers like these.
Now, nothing goes up in a straight line. And that will be true of U.S. stocks in the days and weeks ahead.
We’ve seen some volatility (aka price swings) to start the year…
After my stock-picking system signaled overbought market conditions late last year, we saw the pullback I predicted. The S&P 500, the Dow, and the Russell 2000 small-cap index dropped between 3% and 6% in January – before bouncing back this month.
Add scary virus headlines into the mix, and you can expect more zigzagging ahead. Just remember, it’s all normal. Stocks will go down as well as up. But over time, the direction will be higher.
Over the last 30 years, for instance, the S&P 500 is up more than 1,700% with dividends reinvested.
That works out to average gains of about 10% a year. That’s more than enough to weather inflation (and volatility) and grow your nest egg.
And President Trump’s latest tax cut proposal incentives will add even more to stock investors’ bottom lines.
So consider buying an index fund like the SPDR S&P 500 ETF Trust (SPY) – and don’t touch it for the next 30 years.
As the stock market continues to climb higher, you’ll be glad you did.
Stay bullish!
Jason Bodner
Editor, Palm Beach Trader
Chris’ note: Jason has just launched a new e-letter. It’s called Palm Beach Insider. It’s free to read. And I’d encourage you to check it out… especially if you’re sick of hearing all the negativity about stocks in the mainstream press.
Jason spent nearly 20 years on Wall Street putting together multibillion-dollar trades for clients. It taught him how to identify when deep-pocketed investors take positions in stocks and rocket them higher. And that’s what he’ll be doing at Palm Beach Insider.
Normally, it costs $4,000 to get Jason’s research and insights. But he’ll be sharing some of his secret sauce… as well as identifying new opportunities to profit… with a wider audience in his free new e-letter. To make sure you get Jason’s updates, sign up here.