Markets in a Nutshell
March 22, 2010 Issue
Stocks were up again last week with the Dow adding 1.1% to its 2010 gain which is now 3.0%. The S&P 500 gained 0.9% and is up 4.0% for the year while the Nasdaq (heavy technology stocks) added 0.3% and is up 4.6% in 2010. Bonds gained and are up 2.1% for the year. Gold and the dollar both gained last week and gold is now up 1% for the year while the dollar has gained 3.7%.
Is the job market about to get better? Many economists believe that when the March employment number come out we will see that companies are hiring again. National Association for Business Economics president Lynn Reaser (in an article in the 3/22 Investors Business Daily) sees job growth hitting a consistent 200,000 a month by the end of 2010. Jobs growth is, of course, sorely needed for the economy to show a longer recovery from the 8.4 million jobs lost since December 2007. It is estimated that 150,000 new jobs are needed every month just to accommodate new workers- ie college grads- into the workforce. So we will have a long trek back to "full employment" as we accommodate new workers while also bringing back the layed off workers. Which will also mean a likely slower pace of recovery than we have been used to the past 25 years since people buying stuff (consumer spending) makes up 70% of our economy.
Are U.S. stocks expensive or cheap? That was the question debated in an article in the 3/9/10 Wall Street Journal. University of Pennsylvania Wharton School professor Jeremy Siegel is one of those in the "stocks are cheap" camp. Siegel figures stocks (S&P 500) are selling at lower than normal historical levels right now. He looks at future estimated corporate earnings (called a forward price/earnings-p/e- ratio) to calculate stock valuations and comes up with stocks selling at 14.5 times estimated 2010 earnings. This would compare to Siegel's calculation that stocks usually sell at 18.5 times forward earnings coming out of recession. Ah, but of course not all agree with Professor Siegel. Read on...
Yale University economics professor Robert Shiller sees stocks as expensive and not cheap right now. His calculations look at the past 10 years average earnings to figure out stock valuations. His numbers show the market p/e ratio at 20.6 currently, above the long term average of 16. Mr. Shiller sees stocks falling to the below the average valuation before declaring an end to the bear market that started in 2000.
It looks like businesses are slowly ramping up production again. The 3/16 Wall Street Journal reports that factory utilization (the percent of a company's potential use of production) rose to 72.7% in February, up from the low of 68.3% in June 2009. While the improvement is a good sign, there is still a ways to go to reach the 40 year average of 80.6%.