Revisiting the List of Worries
James Altucher suggests that the S&P 500 is going to 1500, an increase of over 40%. He provides seven good reasons. He notes that stocks are trading at 11 times forward earnings. Average would be 15 or more, and the current low interest rates suggest an even higher multiple might be appropriate. I view valuation on forward earnings as the single best indicator of sentiment since it is dollar and trade-weighted. James also notes the extreme bearishness of those commenting on his article. The fine team at Bespoke Investment Group notes that bearish sentiment is back at the levels of July, 2009. (Check out their typically fine chart).
Many who believe that the low earnings multiple is justified either focus only on past earnings, expect an economic decline, or believe that we are in a new regime where stocks will never again achieve historic P/E ratios. In past years, this last assertion would be met with some skepticism since we all question those who say "It's different this time." In the current market environment there is surprising acceptance of a rather extreme proposition.
Mistaken Bearish Predictions
The Altucher column focused on several good positive indicators. In addition to these factors, we should also consider reduced worries on several fronts. These are all examples of bearish predictions gone wrong — topics that were the focal point of discussions for days, weeks, or months, but now seem to be mistaken.
The popular assertion was that auto sales would collapse after the Cash for Clunkers program. Most believed that sales would be pulled forward with no lasting impact on the overall trend. (I was among the skeptics). Consider the actual seasonally adjusted data from Wolfram Alpha.
You can see the program effect and the later sales strength, up more than 20% from prior levels. Could the same thing happen after the expiration of government programs for home sales?
For many years the most bearish pundits have explained that consumers are "spent up, not pent up." They have argued that personal consumption expenditures would fall with home prices. They have (inaccurately) argued that consumers are "70% of the economy" and projected a collapse of GDP with weaker consumer spending. Let us look at the seasonally adjusted data, once again from Wolfram Alpha.
My guess is that most skeptics do not even know that spending has exceeded the old highs, even with current unemployment levels. The spending dip was never as great as predicted by the bears and it was very temporary.
Europe and the Euro
Beginning in early May the market collapsed with non-stop coverage of the sovereign debt crisis. There were to be many defaulting countries. European and international programs would fail. Many of the loudest (but not most accurate) voices predicted that countries would drop out of the European Union and the Euro would go to parity with the dollar. People quickly identified the Euro as a proxy for a "risk trade" that seemed to include almost anything except bonds.
While the European story is certainly not over, the gloom and doom predictions are not supported by actual data.
The Euro has certainly moved lower since May, but it seems to have found a bottom and rebounded significantly. At one point there were extreme predictions that a small change in the Euro could imply the loss of thousands of points in the Dow.
Those with a political agenda have emphasized the impending expiration of the Bush tax cuts. I have argued that this will actually stimulate a bipartisan approach to the deficit question.
It is difficult for any of us to predict policy outcomes when the specific plan is unknown. Larry Kudlow's interview with Revenue Secretary Geithner showed flexibility from the Obama Administration on capital gains and dividend taxation. (Kudlow views this as a shift, but it seems consistent with past statements).
This approach would be market-friendly on both taxes and the deficit negotiations. The jury is still out on this point, but the prospects are clearly more positive than most believed a few days ago.
Remember how so many predicted that mortgage rates would spike when the Fed ended its purchase program? Instead, rates have reached record lows.
I understand that many excuses can be offered for this failed prediction, but it was a very inaccurate call. The Fed exited gracefully from this market. Once again, it is something to bear in mind as the Fed reduces its balance sheet on other fronts.
There are always many problems. You can try to look smart by emphasizing the worries everyone knows about. This shows the viewer/listener/reader/potential investor that the speaker knows what you know. This message confirms the pre-existing bias of the viewer while establishing a bond.
No one keeps score when the worries are gradually reduced and the forecasts are proven wrong. More importantly….
There is no edge in investments based upon the front page of your newspaper.