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31-Dec-10
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Executive Summary -- December 2010
Interest rates are low; inflation rates are low; earnings growth is strong; dividends are increasing; and both fiscal and monetary policy are geared toward driving stronger levels of economic activity that will help bring down the unemployment rate. In brief, fundamental forces continue to underpin a relative valuation argument for equities.
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30-Nov-10
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Executive Summary -- November 2010
The ongoing need to repair government balance sheets remains a significant headwind for equity markets. The need for austerity in these countries to improve government financial conditions will reduce aggregate demand and curtail global economic growth. This problem, however, does not undermine the relative valuation argument for equities.
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25-Oct-10
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Executive Summary -- October 2010
Our research continues to indicate moderate U.S. economic growth with upside potential above conventional wisdom. This, in conjunction with solid global economic growth, will lead to moderate earnings growth for S&P 500 companies in 2011 that will, over time, lead to a reduction in the risk premium and thus a valuation correction.
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22-Dec-11
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Executive Summary -- December 2011
The S&P 500, as of this writing, is one European headline standard deviation from unchanged for the year. The European debt crisis remains a high risk, uncertain variable for the year ahead. A lot is already built into market prices, however, and anything less than a significant recession in Europe may produce only minimal market damage.
Valuation metrics have also increased with the flat stock market. Profits for 2011 will be up about 13%. That has driven the earnings yield up (and the P/E down) as the stock market has not responded in an equivalent manner. Stocks remain extremely cheap on a relative basis. High quality, dividend-paying stocks have fared even better on a relative basis and are likely to continue to do so in 2012.
There is a firmer foundation for economic growth heading into 2012. The employment situation is improving as unemployment claims have eased, consumer spending remains solid, and there are signs of a pulse in the housing market.
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01-Nov-11
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Executive Summary -- November 2011
The European debt problems have not been solved. The deal reached last week will run into difficulties, and it will take years to stabilize government credit imbalances. But there is still a large discount in stocks relative to valuation based on concerns over the European debt situation.
The negative influence on the equity market from the opportunistic talk in September that a double-dip recession had already started has also faded.
The equity market is entering what has historically been a good period for stocks (November to April). There is a fundamental foundation to support that outcome this time around. Fourth quarter earnings are projected to increase 12%, followed by 8% growth in the first quarter, and the Fed will continue to ensure that monetary policy remains very accommodative.
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01-Sep-11
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Executive Summary -- September 2011
A stream of recession consciousness has gripped the capital markets in recent weeks, with Europe unable to convince participants that it has its debt crisis under control and softening data in the U.S. convincing many that the world's (still) largest economy is set to double dip.
Not surprisingly, nattering nabobs of negativism can be heard everywhere. Our view, however, is that the recession concerns are overblown and that equities retain incredible relative value versus Treasuries at current prices.
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13-Jun-11
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Executive Summary -- June 2011
The summer doldrums have arrived. This is not surprising, as we mentioned in our April Executive Summary that, "The [stock] market may well go into a summer funk in the months ahead. The economic outlook remains murky, and there are plenty of legitimate areas of concern."
Stocks retain good, relative long-term value, however, and none of the fundamentals have changed significantly. Our research themes have also not changed.
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01-Apr-11
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Executive Summary -- April 2011
Since our last Executive Summary in February, a war has started in Libya, gas prices have surged, Portugal has reached the brink of becoming a bailout nation, and a cataclysmic tsunami has hit northern Japan, triggering a nuclear crisis in the process. That litany of disquieting developments has prompted many pundits to revise their outlook for the stock market. Not us.
In our latest Executive Summary, we explain why our view remains the same.
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10-Feb-11
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Executive Summary -- February 2011
The relative value argument for stocks, which we have been emphasizing for over six months, has been the backbone of the rally that has driven the stock market up 25% since the beginning of September.
The argument is still valid.
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03-May-12
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Executive Summary -- May 2012
Our long-term view has not changed. Stocks retain excellent relative value.
First quarter earnings for the S&P 500 in aggregate are on track for about a 7% gain over the first quarter of 2011. That is more than sufficient to justify the stock market rally this year. The S&P 500 now trades at 12.7 times 2012 full-year projected earnings. That 7.85% yield more than adequately compensates for the risk inherent in owning equities, particularly when compared to the 1.95% current yield on the 10-year Treasury Note.
Unfortunately, there are reasons to be concerned in the near term. For each of the past two April-August periods, the stock market fell sharply, with a decline of about 10% on average. The seasonal volatility was associated with heightened anxiety over Europe. There are also signs that the U.S. economy continues to struggle.
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05-Mar-12
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Executive Summary - March 2012
Bears who argue that the stock market should not be rising, even while profits are rising, are wrong. There is a legitimate argument that risks are significant, but it is absurd to argue that stocks should not react to improving fundamentals simply because European problems have not all been solved.
The stock market could easily suffer from a correction given the recent impressive run, but unless the fundamentals change, that would simply present a buying opportunity. The stock market rally is justified and stocks remain at excellent relative valuations.
Our view on the equity market is underscored by our economic view. The economy is on the cusp of finally entering a positive feedback loop. We see greater potential for acceleration in the economic recovery in 2012.
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