Consumer Sentiment on Page 33 has come back but it is not nearly where it was in 2007. Consumer net worth is at an all-time high but that has benefited people in the higher ranges of income who have stock holdings and own their own homes.
But there are broader signs that the economy is doing well. If you look at Page 34, you can see that Bank Loans are increasing almost exponentially, so companies are willing to borrow to improve inventories. They are willing to ship. Rail Car Loadings are looking pretty good, a little more volatile than usual. But these are broad signs of how the economy is doing and I think the economy is doing well.
The most encouraging one is the new chart in this series. Small Business Optimism is improving and there is nothing that creates jobs faster than small business. There is nothing that is likely to improve capital spending faster than small business. So favorable trend in this indicator is very encouraging. Now let’s take a look at Earnings.
If you look at World GDP, that would argue that US profits are going to be pretty flat. But there are other indicators which argues against that. That was on Page 37. Page 38 shows something I am going to remind you of every time I make webinar and that is security analysts are always too optimistic. I had a 115 estimate for the S&P last year. Everybody else is 120. We will probably come in at 117 or 118. Analysts are always too optimistic. Be wary.
Now the next page, 39, shows that Revenues are — look at the right hand because the left hand is fourth quarter. Revenues are going to be increasing at 4% for the S&P 500. And the next page shows that Earnings will probably be expanding at about 8% for the S&P 500 because profit margins probably won’t improve much and will continue share buybacks.
Now here is the key page. This is the Median Multiple. I know a lot of people who think we are forming a bubble and many people arguing the market is expensive. But right now, the market is probably at about 17 times earnings. Bubbles occur 25 and 30 times earnings. We are nowhere near a bubble. I know I have said that at every webinar I have had and that has been the case pretty much since 2009. I am not arguing that the market is going back up to even 20 times earnings but if it goes to 18 or 19 times earnings, worth an 8% in its improvement, we could definitely have a 15% appreciation in the S&P 500 this year.
The next page, 42, shows the Shiller Housing Index. What this argues that the market should not be 2100 or 2000, it should be 1300. Shiller’s approach is different from mine. I use trailing 12 month-earnings. He uses normalized 10-year earnings which are held back by the 2008 – 2009 recession. So he comes up with the market being very expensive. My argument is the market isn’t cheap, it is fairly priced but before it is over, it is going to move to a higher multiple.
Page 43 shows the various other assets. If you are not going to put your money into equities, what are you going to put it than into houses if you turn the rental that you’re likely to get on a house into a P/E. Houses or more expensive than stocks. Bonds are certainly more expensive than stocks. So in terms of those two alternatives, stocks are relatively attractive today in the US. Looking at Page 44, what we see is that Manufacturing Productivity has come down a lot from where it was in the early part of the new millennium. But it is still better than 2% which is more than satisfactory for an earnings improvement.
