Tuesday, April 27, 2010

Highlighting The V-Shaped Recovery

With all eyes trained on the financial-regulation bill and the Goldman Sachs hearings, I’d like to keep hope alive by focusing attention on the V-shaped recovery. You may have seen yesterday’s New York Times front-page story: “From the Malls to the Docks, an Economic Recovery Boom Set to Roar.” Of course, I agree. As you know, this has been a key theme of mine in recent months.

Now, it may not last forever. There is a big-government-tax-hike wall standing in front of us next year and beyond. But tea-party politics may tear down that wall in the November midterms. So keep hope alive.

But as far as this year goes, I’m still highlighting the blowout profits and trillions of dollars of capital gains coming from the stock market rally. Profits and capital gains are the purest and most effective economic stimulus of all. Profits are what matter.

Moreover, the stock market may still be undervalued. A new report suggests that S&P companies may earn almost $86 a share in the next year. With today’s S&P index trading just north of 1,200, $86 bucks a share is only 14 times future earnings. And that, at least theoretically, makes stocks the cheapest they’ve been since 1990 (except for the months directly following the Lehman meltdown).

Another key point on the stock market rebound: Did you know that bull markets tend to last about four years on average? They can last as long as five to six years, and they can be as short as a year. But they’re usually about four years. Are we in the early innings of a bull-market run?

And while bank stocks have been clocked recently, I don’t think the proposed financial legislation is going to damage profits to the extent that the banks can’t recover.

To be perfectly honest here, as much as I love to dig into all the money-politics issues -- including the financial-reform bill -- I’m much more interested in these big profits and capital gains. This V-shaped recovery is the most important item on my radar screen. It’s the single-biggest investor issue out there right now. I don’t think the bull market in stocks is over yet.

Again, regarding taxes and regulations, I’ll warn about next year. But frankly, I think the prosperity theme is issue number one.