1. Inadequate money growth
2. Contracting credit aggregates
3. Low growth in nominal GDP
4. The prospect of higher taxes on income and investment
5. The euro crisis
7. The outlook for lower growth in China.
Since then, none of these worries have gone away, although we may be seeing progress on money growth. However, since I listed these reasons to be bearish, the Dow is up by 650 points. So what did I miss?
First of all, as the saying goes, “the Dow climbs a wall of worry”. What I think this means is that unless you have a secret worry that no one else knows about, your worries are already baked into the market.
Secondly, in a world of 0% interest rates, with bond prices headed in a Japanese direction, the stock market offers compellingly attractive relative value, unless you are worried about another Black Swan. But there are always black swan events. You can’t stay in cash waiting for the next one.
Right now, the earnings yield on the S&P 500 (forward) is 7.4%. This compares with a 2.7% yield on the 10-year, for an equity risk premium of 4.7%. And there is plenty of upside: long-term earnings growth, and the possibility of a lower risk premium.