Are Stocks Attractive Now? Part I
The answer depends on whether you focus on the world economy or corporate profits. Those seeking a definitive conclusion may be disappointed. Nevertheless, reviewing the factors that the experts are debating is helpful.
The global economy has moved away from the brink of a depression. Yet there remain a number of outstanding issues: the uncertain effectiveness of the policy decisions made by major economies; the impact of the European debt crisis; the willingness of banks to start lending again; and, the burden of high unemployment in the developed world.
The International Monetary Fund believes that such factors pose a risk to financial stability. The IMF declared that the strong showing of the global economy at the beginning of this year has begun to lose steam. We can already see signs of a slow-down in the U.S. –- our gross domestic product grew, according to Barron's, "only 1.6% in the second quarter [of 2010], down from 3.7% in the first quarter and 5% late last year."
On the other hand, many individual businesses have shown surprising strength. As a percentage of national income, after-tax profits in the second quarter of 2010 were the third-highest since 1947 according to The Wall Street Journal. Barron's points out that there are many well-run companies with robust profits and improving balance sheets. Of particular note is the large amount of cash being held –- they are at levels that have not been seen since the Eisenhower era.
Corporations have succeeded by using the recent crisis to cut costs –- including reducing their workforce. Analysts are questioning the ability of corporations to continue earning strong profits as the ability to cut costs diminishes. Moreover, a weak economy and high unemployment will limit the ability of corporations to grow.
The tension between a slowing economic recovery and the relative health of many businesses is compounded by the angst of an unpredictable future. There are any number of experts who caution about another "lost decade" due to the severe damage caused by the recent financial meltdown.
Others are more optimistic. Warren Buffet declared he is "a huge bull on this country… we won't have a double dip recession." McKinsey & Company surveyed 2,000 executives last month –- 60% said the economy is in recovery and most expect profits to rise from last year.
In the next newsletter, we will look at another factor to consider with respect to the attractiveness of stocks: price. Are stocks priced like the high-end clothes at Nordstrom or the sales rack at TJ Maxx? Although the future remains murky, it may be that stocks are too good of a bargain to pass up.
Words of Wisdom
More than any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly. -- Woody Allen