Let’s establish our time frame. I’m writing about which direction the stock market is going over the next two to five years. Is the value of the S&P 500 going to be greater than its current value of 1030.71? Is the value of the S&P Global 1200 going to be greater than its current value of 1168.01? Or in the next two to five years will their respective values be less?
We’ve just finished the second quarter of 2010. It has been the worst quarter since the fourth quarter of 2008. The S&P Global 1200 has dropped 13.22%. The S&P 500 has dropped by 11.86%.
Well that’s not as bad as the fourth quarter of 2008′s drop of 22.56%. The question is will the market continue to drop as it did into the first quarter of 2009 or will the market follow the route of the second, third, and fourth quarters 2009 with increases respectively of 15.22%, 14.98%, and 5.49%.
Those that are selling and staying on the sidelines in low returning investments like short term bonds, bank CDs, and money markets would argue the markets are going to go down further because of slowing economies, Europe, North America, and China.
Rising taxes, increased regulations, and lower government expenditures will cause the world economy to enter a third depression. This was the jest of an article by Paul Krugman. Paul Krugman is a Nobel Prize winning economist and writes for the New York Times. I have great respect for Dr. Krugman.
His alarmist views presented in his op-ed piece in the New York Times page A14 on June 28, 2010 of the New York edition are not without basis. However the likelihood of his forecast of a third depression is small. The G20 does not operate in a vacuum. Even Republicans spend money to keep the economy going. I believe government expenditures rose during the last Republican administration of President George W. Bush.
Politicians are busy positioning themselves for the upcoming midterm elections. The Republicans are going to be the party of fiscal responsibility. They are going to paint the Democrats as the tax and spend party.
The Democrats are going to present themselves as the politicians of rational, responsibility. They are going to be the champions of the working citizen. They will paint the Republicans as the party that cuts taxes for the wealthy and reduces benefits for the working class.
Both parties will portray each other as evil and the Tea Partiers will rage against the wall.
After the elections congress will take a middle of the road approach to resolving the challenges facing our nation.
Hopefully our President will lead our Nation towards the better world he saw when he ran for election. Take the initiative Mr. President. Review those tapes of President Reagan and President Kennedy. We put you in the White House to lead us. Just do it.
The increased regulations after the crash of 1929 improved the transparency and reliability of information in our capital markets. The government projects during the depression improved our nation’s infrastructure. We receive paybacks to this day from those projects and other projects our tax dollars have been spent on. Our economy has benefited and our capital markets have grown.
Don’t fear what is coming. Participate in its creation. The power is with the people.
Government will do its best to protect our citizens and create open, fair commerce. That’s its function. If it fails it will be replaced.
As responsible citizens we should be vigilant and let our desires be known to our elected representatives. The vote counts if you use it. Only non-voters have non- impact.
Total government receipts as a portion of US GDP (Gross Domestic Product) have almost tripled over the last 80 years and the US GDP has grown. In fact during the last nine years (2000-2009) as government receipts shrank as a portion of GDP, US GDP has shrunk.
This would suggest that the government could increase its receipts and the economy would grow. Again if we look at the years 1929 through 1953, the growth in government receipts was the greatest and the economy grew. We fought the Great Depression, World War II, re-built Europe and Japan, and fought the Korean War. We paid for it.
I am not suggesting that increasing government receipts causes the economy to grow.
I would suggest that balanced government expenditures are good for the economy. It may be at certain levels of taxation the incentive to create more wealth would be destroyed. I would guess this level occurs when the government receipts exceed the income a person could earn. The level of disincentive is probably when taxes are approaching or greater than 50% of earnings.
What is the primary driver of increasing stock prices? Increasing stock prices cause a rise in stock market values. The primary driver is increasing earnings and the probability of future growth of those earnings. Earnings are the mother’s milk of stock prices.
Which way are earnings for the S&P 500 forecasted to go in 2010 and 2011? The answer is up. In fact in 2011, the earnings for the S&P 500 are forecasted to surpass their previous high achieved in 2007. The S&P 500 was 1530.44 at its high in 2007. If the S&P reaches the same high in the next 18 months, it will be a gain of 48.5%.
How much are you going to make in the next 18 months? Will it be greater than 48.5%? Will it have the potential of 48.5%? Will you have the same potential to make money in the next 18 months?
You are not going to make the same return in bonds, CDs, or money markets. You are not going to have the same opportunity 18 months from now. If you have funds that you are not going to use in the next three to five years, you need to seriously consider making the most of the opportunity you have now. If you did not invest last March, 2009, you need to look find places to invest in the equity markets now.
