The old axiom "The stock market always looks ahead" remains in
force. And as is often the case, market forecasters are all over
the lot as to what we can expect in 2011, 2012 and beyond.
The most bearish forecasters can reasonably cite a bearish
consumer, stressed federal and state governments, and trading
partners that have major economic concerns of their own. But it's
important to remember that in times of fear, those bearish pundits
get plenty of attention and their bullish counterparts may seem out
of touch with reality.
So in the trade-off between all of the positive and negative forces
in our economy, the positive factors in play might be getting short
shrift. Here's a quick look at five factors that could push the
stock market onto a nice growth path
1. Profits = Cash = Jobs
Corporations are a fairly predictable lot. They react to economic
downturns and upturns in a repeated fashion. First, they cut jobs.
Then, they generate higher profits thanks to now-smaller
workforces. As those profits pile up on the
, they post abnormally high levels of cash. Finally, when convinced
that the worst has passed and they have tired of over-burdening
shrunken workforces, they begin to re-hire lost employees.
Eventually, unemployment shrinks and consumer spending rises. This
is precisely how things played out in the 1990s, with very positive
results for investors willing to stick it out through the lean
2. A long, long way from onerous interest rates
The cost of borrowing remains near an all-time low as the Federal
Reserve keeps inter-bank lending rates barely above zero. The Fed
is likely to keep rates low for some time to come. When the Fed
finally begins to raise rates -- perhaps some time in 2011 -- they
will go slowly and may simply move rates back up 300 to 400 basis
points, a level which should still be conducive to economic growth
and a level that should still make equities comparatively
attractive relative to fixed income plays.
3. The global consumer
Lost in all of the hand-wringing about global economic problems has
been the stunning rise of a consumer class in Chile, Brazil, Korea,
China, India and elsewhere. Those countries alone account for more
than half of the world's population. And if history is any guide,
markets with fast-rising middle classes (such as Japan in the
1970s) tend to drive demand for global brands. Executives at firms
Procter & Gamble (
have been busy establishing beach heads in those newly-robust
countries, and should become dominant brands in these newer
Brazil in particular is a great story -- the country is in the
process of lifting its neighbors through direct investments and
increasing trade flows. Conveniently for us, major Latin American
markets are just a direct flight away.
4. M&A and private equity give benchmarks
We've seen a reasonable amount of deal-making in 2010. More than we
saw in 2009, when everyone was gun-shy, but perhaps less than what
many forecasters had expected.
The healthcare industry -- especially biotech -- has accounted for
the lion's share of deal-making in recent quarters. But as the
economy stabilizes and companies realize that organic sales growth
is muted, we might see a robust
in mergers and acquisitions (M&A) in other sectors as well --
that is, if the private equity (
) shops don't beat them to it. A lot of these PE firms raised
oodles of money three or four years ago and are bumping up against
deadlines that compel them to put that cash into play or return it
All of these deals are very helpful for investors, as they
establish an appropriate value for businesses and industries.
Hypothetically, if a company is bought for 20 times trailing
earnings and its rivals are trading at 12 times earnings, you can
bet that investors will flock to cheaper rivals in search of the
next hot deal.
For companies sitting on lots of cash (see Reason #1), but have no
interest in doing a deal (Reason #4), then stock buybacks become a
real option. We're already seeing companies as diverse as
Cisco Systems (Nasdaq: CSCO)
buying back gobs of stock. Until and unless the stock market really
zooms ahead, look for an increasing number of companies to announce
large buyback programs, which can be a real boon for per share
profits. For example, since 2005,
Home Depot (
has reduced its share count from 2.2 million to 1.7 million. That
-23% reduction in the share count means that
earnings per share (
is +23% higher -- on the same amount of
Action to Take -->
This is no time for complacency. Risks remain and investors may
want to lock in profits on any fast rallies. But whenever we get a
stock swoon as we saw in June, keep reminding yourself of all of
the positive factors that can be easily forgotten.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.