Though a further drop in stocks will take more of a bite out of consumer confidence and spending, I
continue to expect corporate profits to remain high, and, despite the current economic soft patch, I see little to alter my expectations, as companies successfully navigate an environment of relatively slow growth with productivity gains and a tight lid on costs.
I still see S&P earnings approximating $90 a share in 2011, slightly better than 2.0% economic growth (in the second half of 2010 and for all of 2011) and steady (albeit subdued) jobs creation.
U.S. stocks now sell at only 11.5 times vs. a multi-decade average of 15.3 times and at over 17 times during comparable periods of quiescent inflation and interest rates. By contrast, at 1,020, the S&P appears to be discounting slightly less than $70 a share in 2011 S&P profits, approximately 0.5% economic growth and some job losses.
Stated simply, expectations for the economy and markets are now reduced and are now more reasonable.
A Positive Word for Housing
I have been a bear on housing for some time, and the recent data on sales activity confirm my concerns. This weak housing data has been a clarion call for economic bears, but, again, I am adopting a variant view on housing.
I see latent demand and a number of other pro-growth factors coming to the support of housing in 2011.
Barring a flood of shadow inventory coming out, the residential real estate industry's outlook for next year has improved, reflecting record-low mortgage rates, a multi-decade improvement in affordability, a widening benefit of home ownership vs. renting, dramatically lower home prices compared to 2006-2007 levels and the underproduction of new homes compared to household formations.
The Business of Politics
It is time for our executive and legislative branches to step it up.
While I recognize that this might be wishful thinking, as we move toward midterm elections in November, the chances of thoughtful, innovative and market-friendly fiscal policy initiatives could brighten the outlook for economic growth in 2011-2012.
Doug Kass writes daily for
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