I think Mike Santoli strikes just the right tone in his Streetwise column this weekend in Barron’s.
My headline above is misleading; the NYT page one is not really a contrary indicator. However, in light of the rising evidence of economic improvement, it presents an opportunity — it might be a prudent time, in Mike’s words, to “consider what possible upsets could bring this party to an end.”
“NOW THAT THE FRONT PAGE OF THE NEW YORK TIMES (as of Friday) has gotten wise to the reality of an economic recovery, and the stock market has persisted in mocking the bears daily with blithe afternoon rallies, and the mood among active investors has brightened considerably, it might be time to entertain what could upset the market’s seemingly positive setup.
Thinking about possible bolts from the blue isn’t the same as predicting a nasty turn in the markets. The stock market is ripe for a rest or retreat, but otherwise in decent shape. Such are moments when the prudent wonder what could upend things. . . A China slowdown, or worse, is a standard force majeure clause among bullish observers. None is evident just now, but the China Entrepreneurs Confidence Index has risen toward levels that, in the past, preceded Chinese market pullbacks. The rest of the world likely wouldn’t take any crack in Chinese stocks in stride.
On the domestic front, investor attitudes have gotten sunnier, as investors appear to be getting squeezed into stocks. The big question is what to make of the persistent love being shown to bond mutual funds. On one level, money flows into bond funds are proof of an abiding lack of excitement toward stocks, while helping to keep the crucial credit markets strong. But to what degree is the public’s bingeing on corporate debt implicitly the same as rushing into stocks? Both moves are contingent upon improving profits, tame interest rates and calm markets.
Just because the optimists retain the benefit of the doubt doesn’t mean they shouldn’t challenge their own assumptions.” (emphasis added)
Let’s get more specific:
• 2011 corporate-earnings forecasts for Standard & Poor 500 are > $95. For all of 2010, its < $80. If that is correct, market are not unreasonably valued.
• Note, however, that Wall Street analysts are too optimistic at the top of the cycle and too pessimistic at the bottom. I am not sure where we are at the moment, so I have a hard time figuring out whether to discount the numbers as too bullish or too bearish.
• Also of note: Anticipated earnings increases are coming disproportionately from energy and financials. These tend to be low earnings multiple sectors –meaning don’t expect market gains to be similar to earnings gains percentage wise.
• Last, the median stock’s current 12-month-forward earnings-growth forecast is above 15% now — hence, expectations are getting aggressive.
These are just more pieces of the puzzle — earnings improvements are important, as is recognizing when anticipation catches up to and passes likely earnings gains. When expectations reach unreasonable levels, we are set up for the big disappointment.
We are not there yet, but this is an important sentiment issue worth watching . . .
Barron’s APRIL 12, 2010