Cautious Optimism: An End of Year Present
Let me make my final blog post for 2011 an upbeat assessment of where we might be headed.
My optimism stems from a fascinating chart I came across in a financial industry publication (Nick Murray’s Interactive, Jan. 2010). Based on statistics compiled by Intrinsic Research, the chart looks at the stocks that make up the S&P 500 – but with all financial stocks removed. (Those would be banks, insurance companies and REITs.)
The chart shows three lines over a ten year period: revenue-per-share, earnings-per-share, and stock prices. In general, revenue-per-share and earnings-per-share are key drivers of stock prices.
As of Dec. 8, 2011, for those stocks as a group, revenue-per-share and earnings-per-share were soaring to all-time highs. But their stock prices were still languishing well-below their high points. That is a strong positive for stocks.
And not shown on that particular chart is that profit margins are at 20-year highs and corporate debt levels stand at multi-decade lows. Those are two additional strongly positive indicators for future gains in stocks and stock mutual funds.
No prediction for stocks is ever more than an educated guess, and a myriad of things could screw things up. But I want you to go into the New Year sharing the cautiously optimistic feeling I have, i.e., that the case for higher stock prices in the coming year appears strong.