Tags: Cohen | Miller | stocks | S&P 500

Abby Joseph Cohen, Bill Miller See Further Gains for Stocks in 2014

Monday, 06 Jan 2014 09:57 AM

By Dan Weil

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Stock market gurus Abby Joseph Cohen of Goldman Sachs and Bill Miller of Legg Mason predict the stock market rally will continue through this year, possibly reaching double digits in percentage terms.

The Standard & Poor's 500 Index soared 29.6 percent in 2013, its best showing since 1997.

"We could easily see gains of more than 20 percent," Miller, who runs the Legg Mason Opportunity Trust, tells The New York Times. "And the market wouldn't be overpriced at that level."

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Economic fundamentals are strong, he says, ruling out some potential rally crashers. "Recession? An oil price spike? Sudden tightening by the Fed? I don't see any of that. The path of least resistance is for the market to go higher," Miller notes.

The market's price-earnings (P/E) ratio, currently about 15, could increase markedly, he says. "Historically, in the late stages of a bull market, stocks reach very high multiples, in the range of 20 to 22."

The market should return at least "in the low- to mid-teens [percent]," Miller predicts. "There's really no catalyst for a down market."

As for Cohen, senior investment strategist for Goldman Sachs, she does have some concern about the market's overwhelming bullishness.

"It gives me pause," she tells The Times. "But there's no reason to be a contrarian just for the sake of being contrarian. I look at the fundamentals. Even after such a strong year in 2013, I think it will continue."

Current stock-price levels are to some extent artificial, as they have been "largely driven by liquidity,” she explains, presumably referring to the Federal Reserve's massive easing program.

"But we've begun a transition to valuations that are driven by fundamentals," Cohen adds. And she's impressed with those fundamentals — economic growth, job creation, labor productivity, falling energy prices and mild inflation.

GDP expanded 4.1 percent in the third quarter, and the economy generated 203,000 jobs in November.

"This will provide staying power," Cohen argues.

Goldman Sachs has a baseline forecast of 1,900 for the S&P 500 Index at year-end. That would represent a gain of just 2.8 percent for all of 2014.

But that assumes the P/E ratio stays at about 15. Similar low-inflation periods in the past have produced P/E ratios of 18 to 20, Cohen says.

If the ratio ascends to 19, that would put the S&P 500 at about 2,200 at year-end, according to the Goldman model. That's an increase of 19 percent for the year.

Meanwhile, many experts say stocks are poised for a correction.

"U.S. equities whether they are fully valued or fairly valued, pick your term, it's hard to argue they're cheap. Parts of the U.S. market are frothy," BlackRock Chief Investment Strategist Russ Koesterich, tells the Financial Times.

"The market is vulnerable to a correction, as a lot of good news is priced in and there are signs of complacency, volatility is low."

Editor’s Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See If You Qualify)

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