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Kostohryz: Is the S&P 500's New High Fundamentally Warranted?

Second, most full-cycle macroeconomic indicators are actually flashing bullish signs, at the moment. For example, given high unemployment and relatively low capacity utilization, the economy has lots of running room before meeting any cyclical economic constraints. And on a rolling-three month basis, most cyclical economic indicators are showing acceleration. Thus, in the absence of some sort of external shock, the U.S. economy seems poised to accelerate beyond the 3% growth level before the end of 2013.

Third, monetary conditions are supportive of the U.S. and global economies, and according to Federal Reserve officials, highly accommodative monetary conditions are likely to remain in place for at least the next 12 months.

Secular Fundamentals

I define a secular time frame as at least three full economic cycles that will generally encompass about two decades. This is the time frame where the situation is currently less supportive of stocks.

First, the massive accumulation of private and public debt that has occurred in the U.S. in the past decade must inevitably weigh down on long-term growth in the next two decades relative to the average of the previous century. There is really no way to ultimately escape the fact that higher debt-servicing costs as a percent of private and public income must necessarily lead to slower economic growth and/or higher inflation, and/or higher macroeconomic volatility. There is no free lunch.

Second, demographic dynamics are not particularly supportive of growth on a long-term secular time frame. The productive workforce in the U.S. is projected to shrink in the next two decades, while the number of dependents (children and elderly) is projected to rise, creating a fiscal and productive drag.

Other variables that are key to the secular economic outlook are ambiguous.

For example, the prospect for long-term productivity growth is a hotly debated topic. Some economists believe that the U.S. is at the cusp of a productivity boom, driven by new technologies. Other prestigious economists believe that the U.S. is at the cusp of a major productivity slowdown, caused by a winding down of the productivity gains that have heretofore been generated by information-age technologies.

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