31 March 2012

Best 1st Quarter for Stocks Since 1998

So far, so good.

In early January, I predicted a bull market for stocks this year. From the Union Tribune

The bulls weren’t bullish enough.
The stock market just had its best first quarter in 14 years. The surge has sent Wall Street analysts, some of whose forecasts seemed too sunny three months ago, scrambling to raise their estimates for the year.
“That it’s up isn’t surprising. It’s the magnitude,” said Robert Doll, the chief equity investment manager at BlackRock, the world’s biggest money manager.
Lest you think that this is of interest only to the rich, remember that a majority of pension plans are somehow tied into the stock market. And of course quite a number of investors are in stocks directly, or at least through mutual funds. The wealth of American households moves with the stock market even more than most American households realize. 
This is also good for jobs for at least a couple of reasons. One, companies will have access to more capital that can be used to expand and hire. Two, stock market gains means that more people can afford to retire. More retirees means more job openings. More than a few baby boomers have had to defer retirement because of poor performing investments. 
 In my mind, little seems to have changed since I wrote here in early January that, 
P/E ratios are low and consumption is down. If people are paying only $10 for every $1 of earnings now, think what will happen as higher sales increase profits (GM and Ford, for instance, are now retooled to become profitable at much lower production volumes than before) at the same time that optimism drives P/E ratios up. A rise in profits of, say, 20% coupled with a rise in P/E from about 11 to, say, 15 could mean a rise in indices in the tens of percent. 
There is other good news that suggests that this gain in market indices is not a bubble. Multifactor productivity is up by a record amount. (This measures how much we're actually producing in value with labor and capital, the ultimate, most important measure of whether we can sustain profits and wages.) And consumption, too, is up the most in seven months. (Consumption is 70% of GDP and thus the biggest driver of GDP growth and all that comes with it.)

I don't think that the gains are done yet. I'm still bullish.

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