Cautious Optimism: An End of Year Present
Posted on December 27, 2011
Filed Under Fidelity Investments, Investment Strategy, Personal Investing, The Economic SceneLet 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.
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