Stocks have made it half-way back to the April highs. I think we'll make it all the way back this year.
That doesn't strike me as an especially heroic or bullish position. At this point, all that it would require is a roughly 8% rally. Stocks would finish 2010 with about an 11% gain, including dividends. That's a bit above the long-term historical average, but nothing spectacular.
Last week, I said I thought the correction in stocks was over. I got quite a few emails from readers asking me how I could say such a thing, considering that the economy is falling back into recession or that it never truly got out. The answer is simple. The recession is over. It's been over for at least a year. And we're not about to fall into a new one.
I'm not saying we're in a rip-roaring growth phase. One look at Friday's jobs report will tell you we're not. We're growing very slowly, but we're growing.
The economy lost of 131,000 jobs in July, but if you strip out the loss of 143,000 temporary Census workers (and other government job losses), you'll find the private sector added 71,000 jobs last month. More people have real jobs this month than they did last month.
That's good -- but not great. And this economy is good -- but not great, but also not bad. That's good enough for more gains in stocks.
For corporate earnings to grow a lot, the economy needs to grow only a little. Just look at earnings for the S&P 500, which have bounced back 56% from their recession-era lows. In October 2009, the trailing four-quarter operating earnings for S&P 500 members were $442 billion. Now, they're $690 billion. However, the overall economy, as measured by gross domestic product, has grown only 1.9% from the lows. (By the way, I'm not adjusting earnings or GDP for inflation.)
How can the S&P 500 squeeze a 55% earnings gain out of only 1.9% growth in the economy? You could ask the same question about the downside, in reverse. During the recession, GDP fell 2.1%, but S&P 500 earnings fell 46%. There are two main reasons for this seemingly strange phenomenon.
First, companies can experience outright losses, while the worst that can happen to GDP is that production is reduced. Much of the S&P 500's drop in earnings was attributable to losses in the financial sector, mostly from write-offs of bad loans and bad investments in so-called "toxic assets." While overall earnings were reduced by $248 billion from their August 2007 peak to their October 2009 trough, the S&P 500 financial sector took a $277 billion swing, from profits of $222 billion to an outright loss of $54 billion.
Trackback URL for this story: http://www.smartmoney.com/tb/Jd2n.2FdY.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
Google Inc. (GOOG) confirmed it has bought social-networking widget maker Slide Inc., following blog reports of.. http://bit.ly/almq0j
Google Inc. (GOOG) confirmed it has bought social-networking widget maker Slide Inc., following blog reports of.. http://bit.ly/almq0j
When Will Jobs Materialize? http://bit.ly/bzA7xt
Looking to save a few extra bucks? Check out these 5 great coupons sites at... http://fb.me/Eorg2kdC
The new fad for college kids: the option to rent their textbooks http://fb.me/DWMW5gvC
Read Full Article »