Outlook

If you think of where we are with the stock market, both of the following headlines could be printed accurately tomorrow.

1. S&P 500 down 23% over the last year, slump continues!

2. S&P 500 up 50% since March, looks overheated!

Now, most analysts like to talk about the second fact, because it is a bit more recent and certainly more dramatic. However the question that has to be answered is which one is more accurate.

If you look at various measures in the economy, it has contracted about 15%. That contraction may be reversing and there are two factors in valuation of a stock, earnings and growth.

When the economy started to contract and there were predictions of a possible new Great Depression, the earning did decline, but the very low valuations of March were based on the expectation of continued deterioration. I would argue this assumption was simply wrong and therefore those evaluations constituted a very poor valuation. Of course, it was an accurate valuation based on the sentiment at the time, and it enabled anyone who thought it was too low to make a very tidy profit.

So what about the valuation today? I still think it is a bit low, but not by as much obviously. Also, lets be realistic, there is still a lot of risk so P/E ratios need to be somewhat elevated. However, it is not too high.

I've been saying for awhile that I expect the S&P to hit 1200 this year and then trade in a range for the next few years probably between where it is now and 1200. the real easy money has probably been made and it is necessary to pick industries that will do well in a slow growth environment.