·
S&P at 3000…Morgan Stanley is out today with an analysis that discusses the
feasibility of the stock market (measured by the S&P500) being up an
additional 50% over the next five years based primarily on an elongated
economic cycle that provides the fuel for an extended corporate earnings growth
cycle. More details are available in the article.
What’s
the point? This is an interesting
analysis by M-S. We agree with them that this could be an elongated economic
recovery because of 1) high level of central bank stimulus and 2) “restructuring”
of consumer balance sheets since 2009 that has reduced imbalances, such as
leverage. Also, the average post-WW2 economic recovery is about 5 years, so
there are precedents for long recoveries, 1992-2000 being one such example.
While the M-S forecast appears plausible, we note that no one can forecast the
future; all we can do is make assessments of probabilities of various outcomes.
For this reason, as financial planners, we believe it is important to diversify
one’s investments across several asset classes which helps to reduce portfolio
volatility and act as a hedge against unforeseen market turbulence.
·
Construction and manufacturing data strong….Two reports out this morning bolster the case for
improving economic growth: ISM manufacturing activity index for August rose to
its highest level in over three years; and construction spending increased to
its highest level since 2008.
What’s
the point? Economic data for the past
3-4 months portrays an improving economy, which is what we had anticipated
earlier this year. What is driving this? Several factors: gradual improvement
in employment growth albeit far from levels of previous recoveries; steady
growth in business investment spending; low interest rates due to Federal
Reserve policies; and improvement in consumer financial conditions. We expect
these conditions to continue for the foreseeable future, which supports our
outlook for improving growth in both the economy and corporate profits. These
conditions along with moderate inflation are positive for the financial
markets, particularly stocks. We continue to believe the largest risks now are
exogenous, such as geopolitical events or unexpected weakness in European or
Chinese economies.
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