Are stocks cheap yet? Not if the economy is slowing, these numbers say
Trying to figure out whether the U.S. stock market after the stunning decline of the last month is a bargain or not?
James Mackintosh’s “The Short View” column in today’s (August 23) Financial Times lays out in very clear terms one way to answer the question.
After a month of selling the Standard & Poor’s 500 Stock Index trades at just 10.3 times projected earnings. That’s below the forward price-to-earnings ratio in March 2009, the post-Lehman Brothers bottom. (The average since 1985 is 15.)
But that’s only cheap, Mackintosh points out, if projections for future earnings are accurate.
Right now forecasts by Wall Street analysts are calling for earnings of $108 a share for the 500 stocks in the S&P index. That’s higher than earnings on the index in 2007.
But in 2008 forecasts (and then actual earnings) plunged as the economy fell into recession.
A similar drop to that from 2007 to 2008 in today’s forecast earnings—which is what investors could expect if the U.S. economy dipped back into recession–would put the S&P 500’s price to earnings ratio at 17. That’s not cheap but rather expensive in comparison to the long-term average of 15 since 1985.
A 20% drop in forecast earnings—the rough equivalent of an economic slowdown instead of a recession—would put the price-to-earnings ratio of the S&P 500 at 13. That’s below the average of 15 but not really very cheap given the degree of economic risk that an investor is taking on right now.
Economic growth will be higher than projected, the IMF says, unless, of course, it’s not
Janus, the Roman god of beginnings, transitions, and doorways whose two-faced imaged looked both forward and back, would be proud of the IMF (International Monetary Fund) today.
The IMF raised its forecast for global growth this year to 4.6% from the previous 4.2% forecast in April. (The IMF left its forecast for 2011 at 4.3%)
But the IMF also warned that continued turmoil in the financial markets has increased the risk that the global economy will stall.
In other words, things will be pretty good—unless, of course, they aren’t. Read more
Within six months global stock market performance will diverge–where do you want your money?
It may not look like it but the world’s stock markets are about to start moving in different directions.
That’s certainly not at all clear now. Most days recently all the world’s stock markets have moved in the same direction—DOWN. On June 29, for example, U.S. Standard & Poor’s 500 Index dropped 3.1%, Germany’s DAX Index fell 3.3%, and China’s Shanghai Composite Index plunged 4.3%.
But I think sometime in the not too distant future—somewhere in the next three to six months would be my best guess—the stock markets of the developed and developing world will start to diverge. Six months from now—or less—stocks in China, Brazil, India, and many of the other developing markets will be in clear up trends and stocks in the developed economies of Europe and Japan will still be stuck in decline. The United States will be left in the middle, straddling the divide between the two groups.
Why?
Because the underlying economies are headed in radically different directions within that time period. And where the economic fundamentals go, stocks, eventually, follow.
If I’m right, this divergence should be the cornerstone of your investment strategy over the next year or longer. And, if I’m right, how you allocate your portfolio between these two diverging blocks of economies and markets will determine how well your investments perform during that period.
Let me lay out the case for this divergence in the economic fundamentals-and stock markets. And then you can judge for yourself if I’m right or not. Read more
Within six months global stock market performance will diverge–where do you want your money?
It may not look like it but the world’s stock markets are about to start moving in different directions.
That’s certainly not at all clear now. Most days recently all the world’s stock markets have moved in the same direction—DOWN. On June 29, for example, the U.S. Standard & Poor’s 500 Index dropped 3.1%, Germany’s DAX Index fell 3.3%, and China’s Shanghai Composite Index plunged 4.3%.
But I think sometime in the not too distant future—somewhere in the next three to six months would be my best guess—the stock markets of the developed and developing world will start to diverge. Six months from now—or less—stocks in China, Brazil, India, and many of the other developing markets will be in clear up trends and stocks in the developed economies of Europe and Japan will still be stuck in decline. The United States will be left in the middle, straddling the divide between the two groups.
Why?
Because the underlying economies are headed in radically different directions within that time period. And where the economic fundamentals go, stocks, eventually, follow.
If I’m right, this divergence should be the cornerstone of your investment strategy over the next year or longer. And, if I’m right, how you allocate your portfolio between these two diverging blocks of economies and markets will determine how well your investments perform during that period.
Let me lay out the case for this divergence in the economic fundamentals-and stock markets. And then you can judge for yourself if I’m right or not. Read more
Don’t expect the bond markets to cheer the G20 results
Maybe they shouldn’t have issued a joint statement at all.
Certainly the meaningless promise that the leaders of the world’s 20 largest economies cobbled together after this weekend’s meeting of the G20 isn’t going to increase anyone’s confidence in the direction of the global economy.
Finally the differences between the United States, which remains worried about the health of the global economic recovery, and the European Union, which is trying to restore global confidence in the euro, were just too wide to bridge.
The best world leaders could come up with was an agreement that the G20 expected that governments would cut their budget deficits in half by 2013 and stabilize their debt to GDP ratios by 2016.
Couple of important points about that agreement. Read more
