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Portfolio strategy update I may be too pessimistic, but . . . David Gottstein
Editor’s note: The following column was compiled in early July. David Gottstein is with Dynamic Research Group in Anchorage. I just don’t see where the next sustainable leg up in the market will come from. If S&P earnings grow about 8 percent over the next 4-5 years (quite an accomplishment from here it seems) and the market pays a 20-22 price earnings multiple on those earnings, then we are only looking at about a 6 percent rate of return over that time horizon, including dividends, before tax, from these price levels.
This is hardly anything to get excited about relative to a 5.75 percent long bond market. In a profits recession We believe that we are in a profits recession and the only likely influence that will keep the rest of the economy from going into a tailspin is government action. Lower interest rates, tax cuts, tax rebates and government spending may keep a recession at bay, but I don’t believe it will pull the economy through to a bona fide recovery.
It is true that these temporary measures may help to propel the economy and the market somewhat, but it is unlikely that we will see better growth rate performance without the impetus that causes it also to unleash some inflationary forces. We are likely to get some growth out of the energy sector, across a wide variety of markets, from oil drilling to electricity production. Maintaining a healthy investment position The Administration is starting to talk down the dollar. That could help as far as exports are concerned, but could hurt us again on the inflation front.
A military build-up may also help, but is uncertain at this point because of budget agreements.
Rest assured, that Bush will be losing sleep trying to figure out how to get the economy going again, even if it causes problems down the road. For these reasons, we still maintain a healthy investment posture.
We can’t, however escape the fundamentals. It would take corporate earnings growing at 10 percent, paying in excess of a 22-23 price earnings multiple in order for even historical double digit returns to be achieved. With the financial industry at over capacity due to the last decade of financial services growth, the technology and chip sectors likely to suffer from a malaise for the foreseeable future, trouble in Detroit, in steel, and in industrial production across the board, this is not a form of momentum you can turn on a dime.
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