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Advanced electioneering economics, courtesy Bush administration
David Gottstein Petroleum News Contributing Columnist Editor’s note: David Gottstein is with Dynamic Research Group in Anchorage. This column was written in early July. Advanced electioneering economics. That is a mouthful, but what I really mean is that the Bush administration has pulled out all the weapons in its arsenal to get the economy, and hopefully, the stock market, moving solidly in a positive direction before the next election.
Low interest rates, more tax cuts, massive federal deficits, and an export-oriented falling dollar, have all contributed to the general and growing perception that the combination of these powerful forces at play will propel the economy forward.
And Alan Greenspan, set for another term as head of the Federal Reserve, has learned to survive politically.
He will likely have a pro-Bush economics posture going into the election.
You have to say that the government is fully engaged in trying to improve the economy. And traditionally these moves have had a positive effect.
I have also observed that in the short and possibly intermediate term, stock prices follow the money, and money has been flowing into stocks.
Whether it is interest rates being so low, or because people are feeling more positive, we have seen an impressive run-up in stocks. One, I have to admit, I have been surprised at the strength and breadth of.
Is it working? The proof will be in the second quarter earnings to be reported in July, and the continuum of weekly claims for unemployment and the monthly unemployment numbers.
If earnings come in well, and employment doesn’t get any worse, then the market’s rise will have been somewhat justified.
If you’re to believe the bull market case.
Watch out otherwise. Valuations Byron Wien of Morgan Stanley said it well: “We are in a bull market cycle in a secular bear market.”
This run may have some legs yet, and may go on for a while, but eventually the market will run out of hot air. Even with interest rates so low, trailing PE ratios north of 30 are once again near the stratosphere. Even if you normalize the earnings data, the PE ratio on stocks is close to 20, the upper band of what has often signaled extended fundamental valuations.
Current valuations are discounting almost everything good happening, and nothing in terms of negatives.
Until we see job growth, the risk of a struggling economy is present.
In spite of a full court press in talking the economy up by the administration, et al, we believe interest rates will begin to rise over time, and spoil the housing market boom, the only true growth area as of late, besides healthcare.
This will reverse the positive influence interest rates have had on PE ratios the market has enjoyed for almost 20 years.
It will take a very strong economy to deliver higher stock prices in that scenario.
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