“Have you guys seen food and gas prices lately? U.S. $ will soon be worthless if the Fed keeps printing money.”
Can you guess who said – or should I say – “tweeted” this? (Is that a word?) No, not Ben Bernanke. Lindsay Lohan. Now, believe it or not, I am not “in the know” when it comes to pop culture, so I look to my wife when it comes to the Hollywood celebrity roster. She tells me Ms. Lohan is far from an economist and may have tweeted from a jail cell in California. Regardless, I think her comment reflects the mood and concern of the American public regarding our Fed policy and the actions our government will take over the next couple years.
In addition, a friend recently sent me an article raising issues about Europe and investing internationally with this remark at the top, “Interesting analysis. Europe seems more screwed up than I thought.” It was a three-page email from another investment advisor listing all the troubles that ail Europe. Here are some excerpts:
• The unsustainability of high sovereign debt/deficit levels in advanced economies will remain an important market driver in 2011 and beyond.
• In Europe in particular, structural reforms are needed to improve the fundamental competitiveness and, subsequently, the financial health of the peripheral economies (i.e., Greece, Italy, Portugal and Spain).
We’re hearing the same issues and concerns from our clients, driving them to want to leave the equity markets or sell international stocks.
Believe it or not, there’s plenty to feel good about when it comes to the health of the U.S. and global economies and, more importantly, the companies that reside in these countries. You must dig beyond the newspaper headlines though and take a look at the currency, stock and bond markets. Keep in mind, however, that when you buy stocks, you’re buying ownership in a company, not the government. The health of the country doesn’t necessarily impact the health of the companies that reside there (i.e., the stocks you invest in). For instance, 75 percent of Coca-Cola’s revenue comes from countries outside the U.S.
Now on to some of the positives:
Although everyone was concerned with the debt ceiling and a potential U.S. debt default, it turns out these were possibly just budget-negotiating tactics. As it currently stands, the U.S. can borrow at very low rates evidenced by the fact that the 10-year treasury is trading at under 3 percent. In other words, people are willing to lend the U.S. government their money for 10 years at 3 percent. Not exactly a rate for high-risk credit or a party that could potentially default on its debt.
Think Europe may be worse? In general, no. Germany’s 10-year borrowing is even lower at 2.88 percent. But look no further than Greece to see what happens when investors question whether a borrower will be able to pay its 10-year bond yields and decides to charge more than 16 percent interest on any money borrowed. With all you hear about the collapse of Europe and the euro, however, the euro actually has strengthened over the past year; it’s gone from $1.19 to $1.40 so far and is still up five percent.
U.S. markets are up more than six percent this year and over 30 percent during the past year. The other European stock markets are flat this year. Not great, but they’ve been up over 36 percent in the past year. And keep in mind, this is nothing like the 15-percent slide Greece’s stocks have experienced.
Stock market valuations also look relatively attractive. U.S. corporate profit growth is expected to be 13.2 percent year-over-year, which is about double the historical norm. Despite low interest rates, U.S. markets are trading at a historically cheap price-to-earnings ratio due to 2011 expected earnings. (PE ratios are a measure of how expensive or inexpensive stocks are. The historical average since 1940 is 16; the current ratio is 13.5.) Additionally, European companies are experiencing the strongest profit gains in 20 years, with price-to-earnings ratios even lower than the U.S.
What’s more, the International Money Fund expects the world economy to grow close to 4.5 percent in 2011 and that emerging markets, like China and Brazil, will grow 6.5 percent. Don’t think the U.S. will be left out though. Economists expect our gross domestic product to grow in the neighborhood of 3 percent this year and 3.5-4.0 percent in next year.
So to sum it up, corporate profits remain strong, the world economy is growing, interest rates remain low, and inflation remains in check. In other words, life is good. Now go enjoy your summer.
