I’m a glass half full kind of person. That’s quite an accomplishment coming from my family, who not only believes the glass is half empty but that it’s teetering on the edge of the counter and is about to get knocked to the floor and shatter into a million pieces. Then we’ll have to wear shoes in the kitchen for a month, otherwise we’ll get shards of glass impaled in our feet.
Over the past year, while talking about the markets and the economy with my father, he’d often skeptically ask the question – “What’s going to make the economy recover?”
My answer was always the same. “I don’t know what’s going to cause it to recover, but the market is telling us it is going to recover.”
The markets are a forward-looking mechanism. They rise and fall a few months ahead of macro-economic trends.
The market topped in October 2007. The Great Recession officially began in December of that year. Similarly, the market hit a bottom in March 2009. The recession formally ended three months later.
There are still plenty of nattering nabobs of negativism out there who refuse to look at the data and admit things are getting better, often because of a political or economic agenda.
They’ll point to unemployment at a still-too-high 8.3% (although it’s down from over 9%) and ignore things like:
Still not convinced the economy is rebounding?
Earnings for S&P 500 companies were not only up 10% last year, they were record profits for the second year in a row.
And although the market is clearly in a bull phase, P/E ratios have actually come down as stock prices have not kept up with earnings growth.
According to Bespoke Investment Group, the 14.1 P/E ratio of the S&P 500 is below the prior high (of this bull market) of 15.6, back in April – despite earnings growing at a double-digit clip.
P/E ratios in energy and materials companies have gone down the most, presenting investors with some interesting opportunities.
For example, Williams Partners (NYSE: WPZ), a MLP that’s currently in The Ultimate Income Letter’s Perpetual Income Portfolio, has seen its P/E ratio fall from 17.5 in 2010 to 16.3 at the end of 2011, down to 14.0 today, despite the stock price advancing 31% since the end of 2010.
Also, interesting to note that despite a three-year bull market, investor sentiment is still negative. According to the American Association of Individual Investors, only 44.5% of investors are bullish.
So, what are the markets telling us now?
You know that we don’t try to time the market here at Investment U or The Oxford Club. But the fact that the stock market is still climbing, earnings are growing and sentiment is not yet bullish, makes me think this bull still has some legs. And, just as importantly, that the economy will continue to improve.
When sentiment gets significantly more bullish and the market and earnings turn lower, that’s when I’ll start to grow concerned.
We still have serious problems in the country that need to be addressed. But for now, the market is indicating that the sky isn’t falling. In fact, it’s looking clearer every day.