Fair Market Value Update
Written by: Doug Kass
This column originally appeared on Real Money Pro on April 30.
Profits: Corporate profit momentum has turned positive. Historically, the magnitude of the upward earnings revisions has been associated with a near-8% rise in the U.S. stock market over the next six months (and by year-end).
Housing: The outlook for housing is markedly improved. Household formations are recovering, and the NAHB Index and buyer traffic are at five-year highs while inventories are at five year low. The role of residential real estate markets cannot be overstated. Representing a third of household wealth and nearly half of bank assets, housing could add almost 1% to GDP in 2013.
Durable spending: Other types of durable spending are returning -- for instance, autos industry sales have risen sharply to a four-year high.
Household health: Household leverage has moved lower -- household debt/GDP has returned back to the long-term average.
Employment: Employment indicators have improved relative to a year ago. Claims data are lower, and ISM employment components are consistent with monthly payroll gains in excess of 200,000. Hours worked are expanding at a 4% annualized rate.
U.S. monetary policy: 2012 is highlighted by massive global easing of monetary policy and excessive liquidity. Central banks were generally tightening 12 months ago.
NEW YORK (Real Money) -- I am substantially raising my calculation of the S&P's 500 fair market value from 1360 to 1485.
This will surprise many, as it is being done at a time during which some see similarities between the present day and the same time period in 2011, when, reflecting slowing domestic economic momentum and a rising crisis in the eurozone, the U.S. stock market began a period during which share prices began to decline.
It is my view, however, that there are more noticeable dissimilarities than similarities between late-April 2012 and April 2011.
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- Economic growth: Most observers are more cautious regarding domestic growth today, even though the recovery's breadth is better -- employment has improved, and there is a nascent recovery in the residential real estate markets. Consensus (worldwide) GDP forecasts (here and abroad) are far more reasonable today.