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Portfolio strategy update Perception versus reality David Gottstein
Editor’s note: The following column was written in late January. David Gottstein is with Dynamic Research Group in Anchorage. The end of the recession is near.
Unemployment levels have bottomed out. Inventories will have to be replenished. The Federal Reserve will likely continue to loosen its monetary policy. The Federal government will pass an effective stimulus package. In historical terms autos and housing continue to remain robust.
The economy will likely turn positive in the second half of the year. We are at the beginning of another bull market.
And the tooth fairy will make everything okay.
By and large, just about everything, including the kitchen sink, has been used to generate positive feelings about the economy, and to give people confidence about the future. This has lead to increased investor confidence, and a considerable recovery in stock valuations since the tragic events of Sept. 11. And in fact there has even been an up-tick in the index of leading economic indicators.
There are a lot of reasons, however, for people and the government to be reporting all this good news, many of them for self serving reasons.
News not all good The reality is that even though the economy may currently not be as bad as it was, or expected to be last September, it doesn’t mean that we are on the road to recovery yet. Things are still pretty bad.
Layoffs continue to be reported almost on a weekly basis. When was the last time you heard about significant new hires, or plans to go forward with new plant capacity, at least domestically instead of in China? Where any new pick up in demand may well be serviced by_________________.
Ford plans to close five plants, just to stay alive. Corning is ramping back up four plants due to inventory depletion, but they admit it will be at a very tepid pace.
Consumers have still been spending, but there is no other leg in sight without increased employment because debt levels are already at historic highs.
The airline and travel industry are still in the pits, for the foreseeable future, with billions expected in losses again this year.
And money supply has turned South, with the Fed having trouble keeping the punch bowl full. Not all bad We are not saying that all is bad; it’s just that mostly just the good news is being reasoned for future economic performance, as a backdrop for stock market opportunities moving forward. The problem is that once again all the good news is already priced into the market, without much room for error.
We believe employment, and therefore personal income and consumer spending, will not come back as soon as many expect.
And that the improvement in corporate earnings this year will be anemic at best.
In the final analysis there is much more room for negative surprises than positive ones at current stock market valuations. With PE ratios ranging between 24-30, depending upon what kind of earnings you wish to use.
Seems pretty high for an earnings growth outlook not much greater than 8 percent on a realistic relative basis.
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