There’s an interesting dichotomy in the perspective of stock market observers these days. One camp, comprised largely of journalists and economists, is focused almost exclusively on macroeconomic factors like the European debt crisis, the U.S. unemployment rate and the dysfunction of the American political system. Not surprisingly, these people are generally bearish about the market.
Individual investors seem to be siding with this group. They know that unemployment remains stubbornly high. They may even have friends and associates who have lost their jobs. They watch and read the news and are aware of the problems in Europe and Washington D.C. And they see evidence of our lagging economy every day in the form of vacant retail space and sluggish real estate sales in their own communities. In the face of all of these challenges, it's hard to be optimistic.
But there is another perspective. A second camp, comprised largely of investment managers and analysts, is squarely focused on the nuts and bolts of investing – corporate earnings, dividend yields and stock prices. This group, though aware of the economic challenges and political headwinds, is cautiously optimistic about the prospects for their portfolios. Notice that I didn’t say they’re bullish about “the market.” That’s because they’re not paid to speculate about the general direction of the economy or the stock market. They’re paid to identify attractively priced stocks of well managed companies that are consistently growing their earnings. And they’re having no trouble finding such stocks these days.
That’s not surprising given that the Standard and Poor’s 500, an index comprised of 500 large U.S. companies, currently trades at only 12 times 2011 earnings. Let me put that into perspective. Since 1954, the collective price of major U.S. companies has been higher than that more than 80 percent of the time. Another sign of the discounted times: As of September 30, the yield of the 10-year Treasury was 1.98%, lower than the average yield of the S&P 500. It’s rare that corporate dividends are higher than the yield on government bonds – and often an enticement for investors to move from bonds to stocks.
What should you make of all of these mixed signals? Is this a terrible time to invest in stocks, or one of the best opportunities in recent years? The answer to that question probably has more to do with your investment time horizon than any other factor. The short-term risks represented by these looming macroeconomic factors are real and investor sentiment is fragile enough that bad news could easily lead to widespread selling and a temporary decline in stock prices. But in the long run, stock prices follow company earnings – which continue to be strong even in the currently weak economic environment. In fact, U.S. company balance sheets are flush with a record $2 trillion-plus in cash, and the drive toward greater efficiency during the recession has resulted in profit margins at or near all-time highs.
So if you’re investing for the long term, it probably makes more sense to act like an investment manager than a journalist or an economist. Think of it as the difference between continuously trying to divine the short-term direction of the economy and the stock market and patiently positioning yourself as a partial owner of some of the world’s best companies.
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