Economic Insights - March 2013

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As we record this segment at the end of February, the S&P 500 is up 6 percent since the start of the year, and 12 percent from a year ago. And there are plenty of Wall Street bears saying that these prices are irrationally high.

It's at times like this that we remember Nouriel Roubini calling the stock rally in 2009 a "dead cat bounce." And, just as then, we believe the bears are ignoring the facts; that is, earnings are good, stocks are cheap relative to those earnings, and the economy is growing.

Let's start with earnings and share prices. Corporate profits were at a record high in the third quarter of 2012 and, so far, reports from the fourth quarter show nearly 70 percent of S&P 500 companies beating estimates, giving the index a 13.6 price-to-earnings ratio.

This is amazingly low, especially with 0 percent short rates and 10-year treasure yields near 2 percent.

Of course, the market could be pricing in another recession, but this is becoming much less probable every day. Just consider the recent numbers.

Consumers started 2013 with the same slow steady progress we've seen for the past three years. Don't be fooled by analysts saying the payroll tax hike is killing the consumer. Overall retail sales were up 0.1 percent in January.

"Core" sales, which exclude autos, building materials, and gasoline, rose 0.1 percent in January and were up 0.4 percent, including upward revisions to prior months. We expect that by the time all the revisions are in, fourth quarter 2012 GDP will be +0.7 percent rather than the original -0.1 percent.

For 2013, we expect two themes to play out:

  • First, a modest acceleration in consumer spending growth despite the recent tax hike.
  • Second, a transition away from growth in auto sales and toward other areas, like furniture, appliances, and building materials.

Consumer spending should accelerate because of continued growth in jobs, hours, and wages. In addition, households have the lowest share of after-tax income committed to making recurring monthly payments like mortgages, rent, car loans, credit cards, and student loans since the early 1980s. Total hours worked were up 1.6 percent from a year earlier, while average hourly earnings were up 2.1 percent.

As a...

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