How “Recovered” is the Economy?
Many experts are trying their hand at profiling our recovery from The Great Recession. The consensus is that our “climb out” has been due, in significant measure, to consumer spending. While this is good news, there are two mitigating factors that you might want to keep your eye on:
The housing market, while much improved, needs buyers and buyers need credit. Our inventory of homes is still higher than our historical average.
Over the last 30 years, the unemployment rate in the U.S. has averaged 6.2%. As of March 2010, that rate was 9.7%, and if you factor people working part time who would prefer full-time jobs and “discouraged” people who want work but aren’t looking, that swells to an “underemployment” of 16.9%.
Yes, this recovery is different than its predecessor. But, housing and employment still play vital roles in our economic health, and we’d be well served to keep an eye on them.
Where are stock values now?
At the end of 1Q10, the major U.S. equity indices: Russell 2000, NASDAQ, S&P 500 and Dow Jones showed respectable returns, at 8.9%, 5.9%, 5.4% and 4.8% respectively. If we use conventional valuation measures, like determining Price/Earnings (P/E) ratios, analysts believe stocks are anywhere from “fairly” valued to “cheap.” As one expert put it, “stocks aren’t as expensive as they were 10 years ago, and not as cheap as they were 10 months ago.”
For the uninitiated, a P/E ratio is the valuation of a company’s share price compared to its per-share earnings, in essence what investors are willing to pay for every dollar it earns. Because these ratios to some degree reflect investor confidence, interest rates and other external influences, they’re a broad and reasonably reliable way to determine if a stock is over-valued, under-valued or fairly valued.
By comparing its current P/E ratio to a stock or mutual fund’s historical P/E average, you’ll know if you’re making a smart buy – the lower the current P/E, the more you’re getting for your money.
If you’d like help choosing the optimum investments for your financial success, call me.
We’re here to help.
John Karas
President & CEO
johnkaras@riverviewbank.com
(360) 693-7442