Buying Stocks Now May Be Less Risky Than You Think
And there has been a flurry of other hopeful signs lately. Homebuilders broke ground on new homes last year at the fastest pace in four years. Sales of autos, the second-biggest consumer purchase, are at a five-year high.
If recent history is any guide, this economic expansion is still young. The expansion that began in June 2009 is 44 months old. The previous three expansions lasted 73 months, 120 months and 92 months. Corporate earnings grow in expansions, which can push stocks higher.
In the 1982-1990 expansion, earnings of companies in the Standard and Poor's 500 stock index grew 50 percent, according to S&P Dow Jones Indices, which oversees the index. The S&P 500 itself surged nearly 170 percent.
For 2013, earnings of S&P 500 companies are expected to grow 7.9 percent, then jump another 11.5 percent next year, according to FactSet. If that's right, stocks could rise fast.But history offers three caveats: First, if you look at the 11 expansions back to World War II, instead of the last three, they last 59 months on average. By that measure, the current expansion is middle aged, not young. Second, investing based on U.S. economic expansions may not work as well as in the past. Big U.S. companies generate nearly half their revenue from overseas now so you need to worry about other economies, too. The 17 European countries that use the euro as a currency have been in recession for more than a year. Japan, the world's third largest economy, has struggled to grow. If the worst is over for these countries, U.S. stocks could continue rising. If the growth drags, stocks could fall. Third, earnings forecasts are often too high. They come from financial analysts who study companies and advise on stocks to buy. In the past 15 years, their annual earnings forecasts were an average 10 percent too high, according to FactSet. Last year, they got closer: They overestimated by 4 percent.
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