The Economy and Market Don't Always Agree

I don’t think the US economy is in good shape.

I am most discouraged when I consider the bloated and out-of-control federal and state governments. They spend too much. They are in too much debt. They are far too powerful. And I think it is fair to say that current administration is hostile to business. I think the US dollar is a sick currency.

But here is the thing: None of this really has much to do with investing. A lousy economy can be a great place to invest. And an economy in great health can be a terrible place to invest. It all depends on prices. All the noshing on economic data doesn’t mean much without some context. You need to know what you get for what you pay.

On that front, things don’t look so bad. As Barron’s reports, “The forward P/E on the S&P Index is below 12, the lowest since the late 1980s.” Unless profits collapse, the market overall does not look expensive. Many of the big stocks in the S&P 500 trade for 10-12 times their 2010 earnings estimate.

Keep in mind profits have already collapsed. So while profits are growing now, they are still way below pre-recession levels. We’re working off a low base.

Beyond this, I think a lot of how you feel about investing comes down to time horizon. I feel pretty good about what we own. I think the stocks we have can create a lot of value for shareholders, often in more ways than one.

But I don’t know if they’ll work in the next three months. I think long term.

Chris Mayer
for The Daily Reckoning