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Portfolio strategy update A Jobless Recovery? David Gottstein Petroleum News Contributing Columnist Editor’s note: David Gottstein is with Dynamic Research Group in Anchorage. This column was written May 5. There are a lot of people saying we are poised for a recovery. They point to corporate profit growth. The end of the war with Iraq and the prospects for tax cuts bode well for us looking forward, as they say. And there is a smattering of sectors with modest growth.
The problem is that earnings comparisons are against terrible previous numbers, and unless there are significant changes in the budget battle with regard to tax cuts, they won’t offer much economic stimulus anytime in the near future. But the really significant part of the story is that the unemployment rate is still creeping upward, now at an eight year high of 6 percent. Without job and income growth, it is almost impossible to experience any material demand growth. Especially with the refinancing of mortgages almost all played out.
The good news is that our economy has a strong prejudice for growth. And it is bucking a long-term trend when it doesn’t. The bad news is that there isn’t any economic steam emanating from anyplace except for debt financed government deficits. It is likely we will eek out some level of economic growth. The big unknown, of course, is how robust or tepid. We are still in the tepid camp. It is true that the end of the war has engendered legitimate increases in investment and other comfort levels. And the price of oil has come down dramatically from pre-war highs. And may yet fall further. Promoting even more growth. However, until we see capital spending improve, and at least three consecutive months of job growth or falling unemployment, we will remain cautious about the economy. Not a cheap market We don’t believe, at recent market highs, that the market is materially over-valued here, but it isn’t a bargain at all. At about 17-18 times current earnings, it is still on the high side historically, but interest rates are at historic lows as well. If you believe corporate earnings are set to increase 10-plus percent per year for the next few years, then the market is fairly priced.
If you believe, as we do, that economic growth will be less robust than is typical coming out of a soft economic period, then the fundamentals don’t offer much appreciation potential in the short run. We will reiterate this month that China will continue to be a nuisance when it comes to our own economic growth. And will continue to suck jobs away from America’s factories. This will curtail top line revenue growth for much of the economy.
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