US stocks are rallying . Reports showed the American economy grew faster than earlier estimated. Jobless claims declined more than forecast. The economy and the stock market NEVER NEVER ceases to surprise us!
The euro strengthened. Greek bonds surged as German lawmakers backed expansion of a European bailout fund.
No end to positive and negative surprises. How exciting!
-- The sell-off in global equity markets in recent months has pushed stocks deep into the red for the year. The MSCI AC world index has fallen nearly 15% this year and 20% since the highs registered in early-May. One consequence of this decline has been a substantial compression of the PE ratio. Indeed, the world is now trading at just 9.9x 2012 earnings estimates.
-- Compared to any period over the last 25 years, aside from the height of the financial crisis, these levels look extraordinarily low. We need to go to the inflationary 70s to see similar levels. But does that mean stocks are cheap? There is a difference between a low PE and a cheap equity market.
Multiples can be low for a host of reasons. To be 'cheap' though, equities must compensate investors for the risk associated with their investment.
-- We can identify a few reasons why PE multiples are lower. The 'new normal' backdrop, characterized by slow growth, de-leveraging and balance sheet repair is clearly a contributing factor. As we noted earlier this year, these dynamics likely shave a couple of PE points from ‘fair value’. In addition, the systematic risk posed by Europe’s sovereign debt crisis depresses multiples.
-- Further, we believe the current forward PE is higher than it appears due to overly aggressive consensus earnings expectations. As we have noted regularly, bottom up forecasts that call for mid double-digit growth this year and next are too high. And while earnings downgrades have started, they have been concentrated in Europe, and the process still appears in early stages.
Of course, they are dirt cheap. Those that I follow.....
One thing about this long losing streak in the market is that, when it it turns, it will turn sharply. Because every joker knows that stocks have come down from a much higher level. Anything they can grab, they will grab at any price in the initial phase of the recovery.
I don't know when the jump will come. That is the whole problem for me. And you....
Most Asian stocks rose, led by exporters and mining companies, after the heads of
Europe
’s two biggest economies pledged to shield banks from a debt crisis, easing concern the region’s troubles will derail a global economic recovery.
More than three stocks rose for each that fell after German Chancellor
Angela Merkel
said European leaders would do “everything necessary” to ensure banks have adequate capital. The gauge dropped 14 percent in September on speculation Europe’s sovereign-debt crisis and slowing U.S. economic growth may derail a global recovery.
The U.S. has likely dodged a recession for now, even though it’s too early to sound the all- clear for the economy.
A string of stronger-than-projected statistics -- capped by the news on Oct. 7 of a 103,000 rise in payrolls last month -- has prompted economists at Goldman Sachs Group Inc. and Macroeconomic Advisers LLC to raise their forecasts for third quarter growth to 2.5 percent from about 2 percent. That’s nearly double the second quarter’s 1.3 percent rate and would be the fastest growth in a year.
“The
U.S. economy
doesn’t look like it’s double-dipping at all,” said
Allen Sinai
, president of Decision Economics Inc. in New York. “But it is a crummy recovery.”
