Economic tea leaves point toward steady recovery

(MoneyWatch) It seems like the headlines are always bad. To help you keep a balanced perspective (and perhaps your sense of discipline), we'll take a look at some of the good news.

Stock prices. Despite bad news on topics ranging the fiscal cliff and the crises in the Middle East to the recession in Europe, the S&P 500 Index gained 16 percent in 2012. Last month, the S&P 500 was trading at a price-to-earnings ratio of 14.6, which was cheaper than either the 25- or 50-year average for this ratio. Even now, it's at about 15. And the low yields on Treasuries make stocks even more attractive when comparing them to the bond alternatives.

As another indicator of the relative attractiveness of stocks, the yield on the SPDR Barclays Capital High Yield Bond ETF (JNK) is about 6.8 percent. That's below the roughly 7 percent earnings yield on the S&P 500 (the inverse of the P/E ratio), which makes stocks relatively more attractive. This is the first time we've seen that in over 20 years.

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Corporate earnings. Corporate balance sheets have recovered from the financial crisis. The sharp drop in interest rates has allowed corporations to refinance debt at much lower rates. And corporate profits are now at record levels. Interest payments relative to cash flow are now at their 64-year average. Companies are now sitting on more than $1.7 trillion in cash.

Consumer spending. Consumer balance sheets are also in much better shape. U.S. households spent just 10.6 percent of their after-tax income on debt in the third quarter, near a 30-year low.

The improvement in their balance sheets provides consumers with greater confidence in their ability to spend. Consumer spending in November showed the strongest inflation-adjusted increase since August 2009. And December retail sales increased a more-than-expected 0.5 percent after an upwardly revised 0.4 percent rise in November.

State budgets. The fiscal health of 48 of the 50 U.S. states has improved dramatically as they have taken significant steps to address their deficits.

Unemployment. On January 24, the government reported that new applications for jobless benefits fell to 330,000. That's the lowest level in five years.

Commodities. West Texas Intermediate crude oil, which began the year at about $100 a barrel, is now trading at about $97 a barrel. Innovations in technology have led to a boom in natural gas, which has brought natural gas prices down from almost $11 per thousand cubic feet in the summer of 2008 to about $3.50 currently. In addition, the sharp drop in prices is leading to a renaissance in U.S. manufacturing.

Housing. The housing industry, the epicenter of the recession, is recovering. While purchases of new U.S. homes unexpectedly dropped in December, new home sales increased 19.9 percent for all of 2012, the biggest jump since 1983 and the first gain since 2005. Importantly, the median price of a new home increased 13.9 percent last month from a year ago, climbing to $248,900. In addition, previously owned homes sold at a 4.94 million rate in December, the second-highest since 2009. Last year 4.65 million homes were sold, up 9.2 percent from 4.26 million in 2011 and the most since 2007. The annual advance was the biggest since 2004.

The Commerce Department reported that new home construction surged 12.1 percent last month to a 954,000-unit annual rate, the most since June 2008. In November, contracts to buy previously owned homes rose for the 19th straight month, up 9.8 percent from a year earlier.

New orders for manufactured durable goods in October increased for the fifth time in the last six months.

Image courtesy of Flickr user Candie_N

[MPT2013]

The economy and the stock market aren't the same

One bit of investing conventional wisdom is that high country growth rates means high stock returns in those economies. Many investors associate this bit of conventional wisdom with China, which had a growth rate of 7.7 percent in 2012, or 3.5 times that of the U.S. In fact, the past five years have seen China experience an economic growth rate about 9 percent, about 15 times that of the U.S.

However, despite the faster rate of economic growth, the iShares Trust FTSE China 25 Index Fund (FXI) lost 4.8 percent a year over that period, while Vanguard's 500 Index Fund (VFINX) gained 1.1 percent a year.

Ignore all forecasts...

[LarryswedroeCBS]

MPT
That of course is true, as a very wise man said it (:-))

However, the point of the post was not to make any prediction about the market but to help keep investors disciplined by pointing out that things may not be as gloomy as the financial media often make it out to be

More specifically on the subject, it's not the rate of growth of economy that matters to the market, but the rate of growth relative to what was EXPECTED. Positive surprises are good and negative ones bad of course.

Best wishes
Larry