Many investors expect the economy to stay not too hot and not too cool, and they may be right about the year's first half. But trouble looms on the horizon.
The odds that the U.S. stock market will win its current bet look daunting.
Investors who've been pushing up stocks are betting that the U.S. economy will produce a big enough increase in earnings to keep stock prices headed higher and at the same time show enough signs of weakness to prevent the Federal Reserve from raising interest rates in 2010.
Seems like trying to get a camel through the eye of a needle?
Well, I think the odds are better than you might think -- for the first half of 2010. Then they get progressively worse until, by 2011, the chances that the stock market will get the precise balance it needs are almost nil. (This column is an update of my how to worry/when to worry post at JubakPicks.com.)
The key to my relatively optimistic view for the first half of 2010? Timing.Earnings collapse, then surge For example, take a look at quarter-by-quarter earnings projections for the stocks in the Standard & Poor's 500 Index ($INX).
Operating earnings collapsed at the end of 2008. For the fourth quarter, the 500 companies in the index showed a total operating loss of 9 cents a share. In the fourth quarter of 2007, these companies showed total operating earnings of $15.22 a share. I think that qualifies as a collapse.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=fb4f1827-d65d-4a2f-9365-8f51e4ac62ad,9f0e7867-ad67-4a39-ac00-37922cc7036d,338cd929-d834-4892-a158-7ed7e809203a,764032af-cf87-4bcb-8c5d-bea025502249", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=fb4f1827-d65d-4a2f-9365-8f51e4ac62ad,9f0e7867-ad67-4a39-ac00-37922cc7036d,338cd929-d834-4892-a158-7ed7e809203a,764032af-cf87-4bcb-8c5d-bea025502249;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');For the fourth quarter of 2009, the one that companies are reporting now, Wall Street analysts are forecasting total operating earnings for the S&P of $16.08 a share. That's a huge swing and explains, in part, why stocks have rallied so strongly since March 2009.
But watch what's likely to happen as 2010 moves along:
In the first quarter, projections call for operating earnings of $17.12 a share, up from $10.11 in the first quarter of 2009. That's 69% earnings growth year to year.Second-quarter operating earnings are projected at $18.59 a share, up from $13.01 in the second quarter of 2009. That's a 43% jump.Third-quarter earnings are projected at $19.92, up from $15.78 in the third quarter of 2009. That's a 26% increase.See the pattern here? As stocks move further from the bottom in earnings at the end of 2008, year-to-year earnings growth slows because the year-earlier quarter was progressively less horrible.
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That makes spectacular earnings growth pretty easy to come by in the first half of 2010 while making earnings growth in the second half of the year look increasingly ordinary (especially if stocks have kept moving up in price quarter by quarter).So the odds that stocks will deliver the earnings needed to justify higher share prices look pretty good in the first half of 2010 and then decline as the second half progresses.
Of course, actual earnings could be way off projections. But here again, I think timing comes to the aid of investors.Will the economy cooperate? The big threat to those earnings projections is the real economy. Actual earnings could fall far below projections if the economy grows more slowly than the 3% most economists are expecting for 2010. With the official unemployment rate at 10% -- and the full unemployment rate north of 17% -- and forecast to remain stubbornly high into 2011, projections of 3% economic growth may seem ludicrously high.
But they're not, and I'll explain why.
By this point in the recession and recovery, I think every investor knows that the unemployment rate is a lagging indicator. Long after the economy has started to grow after a recession, unemployment remains high. Employers are reluctant to do much hiring until they are convinced that the upturn in the economy is real. And then it takes time to find job candidates and interview, process and train them.
Continued: Where will unemployment go?More from MSN Money and MoneyShow.com
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That's alot of ( and, if's and buts ). If I were King of the Forrest, I'd Huff and Puff, and Click my Ruby Red Slippers and the economy would be brand new.
ReplyReport Abuse1 - 1 of 1PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/JubaksJournal/smooth-sailing-now-icebergs-ahead.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*But watch what's likely to happen as 2010 moves along:
See the pattern here? As stocks move further from the bottom in earnings at the end of 2008, year-to-year earnings growth slows because the year-earlier quarter was progressively less horrible.
Find unemployment rates by state
So the odds that stocks will deliver the earnings needed to justify higher share prices look pretty good in the first half of 2010 and then decline as the second half progresses.
Of course, actual earnings could be way off projections. But here again, I think timing comes to the aid of investors.Will the economy cooperate? The big threat to those earnings projections is the real economy. Actual earnings could fall far below projections if the economy grows more slowly than the 3% most economists are expecting for 2010. With the official unemployment rate at 10% -- and the full unemployment rate north of 17% -- and forecast to remain stubbornly high into 2011, projections of 3% economic growth may seem ludicrously high.
But they're not, and I'll explain why.
By this point in the recession and recovery, I think every investor knows that the unemployment rate is a lagging indicator. Long after the economy has started to grow after a recession, unemployment remains high. Employers are reluctant to do much hiring until they are convinced that the upturn in the economy is real. And then it takes time to find job candidates and interview, process and train them.
Continued: Where will unemployment go?More from MSN Money and MoneyShow.com
1 | 2 | 3 | next >
Check out Jim's top stocks for the next 12 months.
Read how to invest with Jubak's showcase portfolio.
Follow the long-term portfolio from Jim's book "The Jubak Picks."
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Hey Jim,
That's alot of ( and, if's and buts ). If I were King of the Forrest, I'd Huff and Puff, and Click my Ruby Red Slippers and the economy would be brand new.
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