Hurricaines & Earthquakes & Emotions
Markets prepare for a recession that probably won’t happen.
The market is pricing in worst-case scenarios which is a good thing as it provides cushion for events such as lowered earnings forecasts.If the U.S. economy manages to avoid a double-dip recession, and Europe muddles through its debt problems then continued earnings growth will lift the U.S. stock market over the years ahead.
Economics puts the risk of a “double-dip” recession at about 35%. Currently, the S&P 500 trades at about 13.2-times trailing earnings, which is above the 12-times trailing earnings share prices tend to reach during recessions, but a 27% discount to the median price-earnings ratio going back to 1998. Until a recession actually takes place, those valuations are pretty attractive no matter how hard the wind is blowing or the earth is shaking.
The things that drive stocks higher over time are a rise in earnings, clean corporate balance sheets, and dividend increases. Which may I remind you that all of those issues are positive today. An increase in earnings in the year ahead, even if below current forecasts, will produce another rise in the stock market.