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
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

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

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

*****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,

The funny thing is, I think most agree that 2010 was
a pretty good year. And I know all the portfolios at the various
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

*****An astute reader noticed I have been including
a misspelled email address in recent issues. Please send comments and
question to [email protected].
Thanks, and sorry about that.

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