|
|
Walter Frank is Chief Economist and Chief Investment Officer of the
MONEYLETTER.com. It is a recipient of the Newsletter Publisher ’s
Association ’s "Best Financial Advisory Newsletter" Award and
has been a leader among mutual fund newsletters for the last 20 years.
|
|
A Little Perspective
As the financial markets whirl in response to every daily parcel of news, it is
useful to step back every now and then and reflect on where we are now. As the
saying goes, you need to know where you are in order to know where you are
going.
The most important consideration in today’s markets is that the recession is over,
and a recovery has begun. Everyone agrees on that. Beyond that, there is
disagreement everywhere.
Short-term rates are at historic lows; long-term rates have come down but remain
relatively high;the bond market is now worried about rate increases from the Fed.
While the bond market frets that activity may become too strong as the economy
recovers, the stock market frets that activity may not be strong enough. Welcome
to the period of transition from recession to recovery. As profits tumbled, U.S.
stocks tumbled considerably less in percentage terms.The result is that price-earnings ratios,
which were high at the market ’s peak (remember "irrational
exuberance"), have remained high. This is the cause of much of today ’s uneasiness.
There is one more factor that is extremely important: Productivity. The economy
is coming out of the recession with excellent productivity numbers. The numbers
will improve sharply in the early stages of the recovery.
What we have then is a decidedly mixed picture as far as the stock market is
concerned. On the one side, we are beginning a recovery. Economic activity will
rise and so will profits, perhaps at a rate surprising us all. Interest rates, at least
short-term rates, are extremely low, and the prospective rate rises over the next
twelve months will still leave rates low.
At the same time, earnings are going to be rising briskly for some time, as should
the twelve-month earnings estimates. There is no reason, considering interest
rates, that price-earnings ratios should fall. This implies a market advancing with
the rise in earnings. Over the medium-term, that is a welcome prospect after the
long two-year drought.
|
Investment Professionals 