Why Stocks Could Jump 25%

“The S&P 500 will hit an all-time high in 2012.”

This prediction was made by Doug Kass a few weeks ago. Kass is president and founder of hedge fund Seabreeze Partners. He is a CNBC contributor and is often quoted in prominent financial publications such as the Wall Street Journal and New York Times.

Kass has a solid track record for betting against stocks. He’s even lectured on short selling at some of the most prominent universities in the world – including Harvard and Yale. Yet he’s predicting the S&P 500 index will surge nearly 25% this year.

I don’t always agree with Kass. However, there is one piece of data that supports his call…

You see, most investors hate stocks. In fact, individual investors have taken $450 billion out of domestic equities since 2007. They have also added $850 billion into bonds. Kass says, “This $1.3 billion swing out of equities is unprecedented in history.”

But it’s not just about individual investors.

According to Investment Company Institute (ICI), an institutional research and analytical firm, hedge funds are now at their lowest net long exposure since March 2009. That was one of the best times in a generation to buy stocks.

I am not expecting a 65% jump in the S&P 500 over the next 12 months. But stocks look relatively attractive compared to bonds and cash right now.

For example, stocks are trading at just 12 times earnings. That’s roughly a 20% discount to their historical norm. The S&P 500 index pays a higher yield than Treasurys. As my colleague Steve Sjuggerud points out…

With the exception of the extreme stock market bust in late-2008/early-2009, this has never happened before. (When it happened in 2008-2009, stocks absolutely soared soon after.)

Also, the U.S. economy is gaining momentum with almost every piece of economic data (housing, manufacturing, and consumer spending).

In short, most of the cash sitting in cash and bonds earning next to nothing in interest could make its way back into equities. That would result in much higher stock prices.

History tells us that some of the greatest investment gains come from being a contrarian investor. Right now, most investors don’t like stocks. If history is any guide, stocks will likely push higher this year – and could even surge to new all-time highs.

Good investing,

– Frank CurzioSource: Growth Stock Wire

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