3 Reasons Investors Should Cheer the Economy

3 Reasons Investors Should Cheer the Economy


Yesterday wasn’t just the first day of spring—it was the first annual International Day of Happiness.  That’s what the United Nations announced.

Yes, really:  It’s an entire day set aside for us to ponder what is going right with the world rather than what is amiss. And in that spirit, I have decided to look at some reasons we have for being happy about the way the economy and the U.S. stock market are going.

Admittedly, some individuals may think this is irrational in light of the fact that the crisis in Cyprus has resurrected fears about a collapse of the Eurozone or a banking sector meltdown--not just in Cyprus but in Spain and elsewhere; that politicians in Washington are still hollering across the aisle at each other, unable to find a sensible solution to deficit reduction; that the Federal Reserve’s emphasis on keeping interest rates so low may be fueling a bond market bubble; and that an Employee Benefit Research Institute survey shows only 43 percent of Americans have managed to save at least $25,000.

But if you are one of those with a tendency to go with the crowd, it’s important to step back every so often and take a different view of the situation.

After all, the last four years in the U.S. stock market have hardly been full of optimism and ebullience, and yet the S&P 500 index has recovered from its post-crisis trough and rallied nearly 130 percent. Anyone who allowed themselves to focus on the high unemployment rate, sluggish pace of economic growth, or the news from Europe or China might well have stuck to the sidelines and lost the chance to benefit from much of that growth.

Similarly, when everyone else is being irrationally exuberant, as in the dot-com era or during the housing market bubble, it’s a good idea to step back and look for storm clouds that the rest of the crowd may be ignoring.

You may already be one of those who views the glass as being half-full, but in case you’re still climbing the wall of worry, here are three reasons to just step back and be happy.

Even after the rebound of the last four years, and after the year-to-date gains, the S&P 500 still trades at only 14.4 times earnings. The real figure should be closer to 30 times earnings, or more, argues Stuart Hoffman, chief equity strategist at Wells Fargo Advisors.

On a historic and relative basis, stocks are indeed cheap, he suggests, even once you consider that bond yields – the basis on which relative value is computed – are at artificially low levels and that growth just isn’t what it once was. Nonetheless, earnings growth has still exceeded the surge in stock market prices, signaling that stocks are “markedly” cheaper than bonds, reflecting “a period of massive investor uncertainty and risk aversion.”

In other words, don’t worry--be happy.

This isn’t news. The data from the housing market has been positive for more than a year and has fueled a big rally in housing stocks.

But while most of us living outside the Sunbelt were grousing about having to shovel snow after yet another March storm, homebuilders have had a blockbuster winter: New construction of single family homes jumped to a level not seen since mid-2008 in February, while new building permits also are rising.

Despite this influx of new supply, however, home prices have remained steady enough that the percentage of Americans who remain underwater on their mortgages, with the size of their loans dwarfing the value of their property, fell to 21.5 percent from 25.2 percent over the course of 2012, according to just-released data. That could well give consumer confidence a timely boost and free up some cash for those homeowners to spend elsewhere, supporting the economy and corporate profits. (See Reason for Happiness #1, above.)

The headlines may look depressing, but so what? We all still went shopping in February to the extent that retail sales jumped 1.1 percent in the month.

Oh, all right, so a big part of that came from the higher cost of gasoline – but it still shows that Americans aren’t letting higher payroll taxes or gasoline prices deter them from shopping. Since consumer spending  accounts for around 70 percent of GDP, that’s important. Consumers may still insist on bargains and confine their spending to purchases that are necessary or great values, but they aren’t keeping their wallets closed: On the margin, the employment picture is looking brighter and the great deleveraging of American households that began in the crisis is now bearing fruit.

For several years, the voluntary or involuntary efforts by Americans to pay down their debt curbed growth; now, recently released figures from the Federal Reserve show that U.S. households devoted only 10.4 percent of their after-tax income to debt repayments in the fourth quarter of 2012, the lowest level since the Fed began tracking this information in 1980 and well below the 32-year average of 11.9 percent. Ideally, that will free up cash that those individuals can use to spend (fueling short term growth and corporate profits) or save (making the long term outlook more sustainable).

Clearly, all three of these ‘reasons for happiness’ are linked tightly together in what could prove to be a rather fragile edifice. A flare up of the Eurozone’s debt crisis could wreak havoc on the outlook for global financial markets, and certainly we’ll all be less than happy if politicians are still wrangling over a solution to sequestration and the threat of another debt ceiling showdown.

That would rapidly curb any uptick in consumer confidence and, in turn, hurt corporate profits and the housing market. Happiness is something that we can aspire toward, but that we all have to work to achieve. After all, the Declaration of Independence promises us the ability to pursue happiness, not its capture or preservation.