Right now, the stock market is experiencing a panic attack. Let’s avoid confusing the market’s gyrations with what’s actually going on in the real economy.
Unfortunately, stocks are overreacting to the convergence of events: the downgrade of U.S. government bonds, some weaker than expected economic data, and the troublesome but manageable U.S. fiscal position. Along with the debt issues threatening Europe, these factors turned market sentiment ugly.
Former Federal Reserve Board Chairman Alan Greenspan put it this way last Sunday on Meet The Press: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Greenspan added that the downgrade however has “hit the self-esteem of the United States, the psyche.”
While such a blow to our nation’s financial reputation cannot be dismissed and must be addressed, it’s also important to remember that there has been no real change in the fundamentals driving the economy.
Here are the facts:
- The leading indicators point to slowly expanding economic activity in the coming months, according to the Conference Board’s most recent appraisal of the economy.
- Weekly unemployment claims have tumbled from the April 2009 peak. The Bureau of Labor Statistics reported modest improvement in job growth for July.
- Corporate earnings estimates keep climbing. Revenues for the Standard & Poor’s 500-companies were up a whopping 13.2%!
- Earnings estimates for 2011 and 2012 rose again last week, continuing a trend of upward estimate revisions.
- The S&P 500 is trading at 11 times 2011 earnings estimates. Investors right now can choose to buy the 10-year Treasury bond with a 2.3% yield or get a 2.2% dividend yield on the S&P 500 plus the potential upside on stocks. Remember to use historical valuations and economic fundamentals to guide long-term investment decisions.
Hysteria is not new to investment markets. I encourage all you to resist panic. Stay focused on the fundamentals that drive long term values with good companies that trade on the market. Let’s employ the successful strategies of Mr. Warren Buffet: (From the Book “The Warren Buffett Way”)
- Turn off the stock market
- Don’t worry about the economy
- Buy a business, not a stock
- Manage a portfolio of businesses