President Andy…
I think we should delay the presidential election until we can find someone to run whose name is Andy. Andy would be a great name for a president. I grew up listening to intelligent, insightful men named Andy. One was the beloved Andy Rooney, who had the last word on “60 minutes” for so many years. He had an amazing knack for expressing sentiments many people felt. His commentary touched on topics from politics, to the economy, to what annoyed him like the ball of cotton in pill bottles. What made him an icon was his ability to connect with the American people through his mix of common sense and unique wit.
But my favorite all-time Andy is Sheriff Andy Taylor. He was a master of common sense, too, despite being surrounded by people devoid of it...
The Andy Griffith Show: (1961)
Rummage Sale Customer: Uh, how much is this?
Sheriff Andy Taylor: Oh, 'bout three dollars.
Rummage Sale Customer: What you suppose it is?
Sheriff Andy Taylor: If I knew that it'd cost you five.
Rummage Sale Customer: Sounds like a bargain.
I always wondered whatever happened to that rummage sale customer. Now I know. He works for the Federal Deposit Insurance Corp. The FDIC recently voted to require all US banks with greater than $50 billion in assets to submit plans as to how they would break up their businesses should they be in danger of failing. These so called “living wills” are supposed to demonstrate that the banks can handle worsening economic times without resulting in another massive taxpayer bailout. There is no mention of these banks developing a plan as to how they would take advantage of improving economic times. One would hope they are doing so anyway…
I find this amusing, but maybe I shouldn’t. After all, 37 banks are impacted by this rule and they account for over 60% of total U.S. bank deposits. Most corporations develop contingency plans for all possible economic scenarios. The best do this well and way before it is mandated by government, which routinely takes elaborate measures to lock the barn door well after the horse ran away, and then boasting that they did something wonderful.
2012 is going to be a year where governments around the world are going to be promoting all kinds of initiatives to fix a
ll kinds of problems, many of which they helped cause and don’t understand. And within all this election-year banter, common sense will be scarcely seen.
Even so, the stock market might continue its upward path driven by strong earnings and an improving jobs market. These two powerful forces have momentum and if it continues, the market is likely to go higher, despite what politicians in this country or in Europe do or don’t do. Earnings, dividends, cash flow, job creation, individual and corporate balance sheets are the Sheriff Taylors to the political Goobers and Barney Fife’s of the world. They are measurable, they make sense. And the trend in all these important factors is decidedly positive. For example, over the past 5 years, dividends for the S&P 500 have grown on average around 4%. In the previous year dividends have grown over 17%. We expect above average dividend growth to continue over the next few years as a result of record corporate cash balances and strong cash flow. Meanwhile, earnings are forecasted to increase around 11% for 2012, not too shabby, given the relatively slow economic recovery. Rising dividends and strong earnings growth bode well for future stock prices.
Buried beneath an unrelenting flow of pessimistic prognostications lies an undervalued stock market… The S&P 500 is selling at 12.3x 2012 earnings per share estimates. If earnings projections prove accurate the market is decidedly cheap. While there are many unknowns, the two most significant being the situation in Europe and the election in November, stocks are undervalued relative to the current level of interest rates, inflation, and historical valuation averages.
Let me close with one more bit of historical perspective. The stock market annualized return for the 10-year period ending in 2011 was essentially 0%, one of the worst periods on record. The return for the 10-year period prior to that encompassing the roaring 1990s was over 17%, one of the best periods on record. The market is overdue for an extended period of at least average returns, if not higher. And the long-term average return for stocks from 1926-2011? 10% per year. Wouldn’t that be something…
Michael Kayes, CFA
