A Faltering Economy: Good for Stocks?
Posted on August 24, 2010
Filed Under Jack Bowers, Mutual Funds, Personal Investing, The Economic SceneInvesting in the stock market is always a glass half full/ glass half empty proposition. On any given day you can find basketfuls of reports painting a rosy picture for say, the next six months, and a roughly equal number expressing the opposite opinion.
It’s never easy. But rarely have I seen as big a disconnect as the one I read about in the current issue of Business Week (August 16-29, 2010).
First, the seemingly good news. A Bloomberg-compiled report, done in early August, studied the stock market forecasts of 12 major investment banks. The consensus results said, “the fastest annual earnings increase in 22 years will push the S&P Index up 20 percent in the last six months of 2010.”
At the same time, the article notes, many of the economists at the same banks are increasingly becoming more pessimistic about the economy.
Can the stock market rally while the economy slumps? Yes. We’ve seen it many times. In the past it’s been referred to as the market “climbing a wall of worry.”
In the current situation, record low interest rates are one of the main factors for optimism. But another propellant for the expected rally is growth of earnings. Corporate earnings are looking robust right now, and going forward seem poised to beat earlier estimates. Cash at companies in the S&P 500 has risen for six straight quarters, partly a result of firing workers by the thousands and partly from reducing capital spending. That stinks for the now unemployed workers, but it helps the firms’ bottom line. Hence the rosy forecast for corporate earnings, and the expectation of higher stock prices.
While a 20 percent jump from current levels seems extreme – and since the 20 percent figure was the consensus number, some forecasts had to be even higher – both Jack Bowers and I have been projecting a rally into the closing months of the year. Time will tell.
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