Irrational Exuberance?
The final revision for 3Q GDP came in this morning at 2.6%. That's only slightly higher than the previous number, 2.5%, and there's no doubt that investors were looking for more. But that disappointment may not be a bad thing...
The feeling that economic activity has picked up in 4Q is palpable. And there have been a slew of upward revisions to both 4Q GDP growth and 2011 growth. We can assume that some of the expected gains from 3Q will show in the 4Q number. Spending will be strong, that's for sure.
*****This is an interesting time for investors. There's no doubt that some are still shell-shocked by the financial crisis. Many are still waiting for the next shoe to drop. And I will confess, I've looked over my shoulder plenty of times.
The mortgage putback issue has made me review my thoughts on banks. The European debt problems forced me to do another thorough portfolio review.
But this is where decision-making based on analysis, rather than emotion, is so important.
For me, the bottom line remains that stocks are reasonably priced on a historical basis, and there is upside for earnings. The Wall Street Journal has the forward P/E for the S&P 500 at 14.4. The Nasdaq is 16.6. These are both within long-term norms.
Now, these P/E ratios are calculated using analysts' earnings estimates, so they cannot be treated as gospel. However, analysts have consistently underestimated earnings ever since the financial crisis.
That's understandable, the "fool me once..." dynamic could cost one their job, so it's advisable to err on the side of caution.
Something like 75% of S&P 500 companies beat earnings expectations in 2010. If that trend continues, then those estimates for 20% advance in the S&P 500 may not be completely insane.
*****For a little context, a 20% gain would out the S&P 500 at 1,500. So far this year, the S&P 500 is up around 12% from its start at 1,116 on January 4, 2010.
The funny thing is, I think most agree that 2010 was a pretty good year. And I know all the portfolios at the various Wyatt Investment Research advisory services have done very well. So if the S&P 500 does even half of what some are forecasting, we will have another very good year.
So, while I'm sure some will see the current rally as "irrational exuberance", don't dismiss the possibility that stocks are a whole are being re-valued for better growth and a stronger economy.
*****An astute reader noticed I have been including a misspelled email address in recent issues. Please send comments and question to dailyprofit@wyattresearch.com. Thanks, and sorry about that.
