As the year 2010 approaches its fourth quarter, there is a indispensable likelihood that foreseen, 2011 fiscal policies will impact financial markets. The S&P 500 has recently leveled off from a precipitous drop after the financial accident of 2008 and retreated from its 2010 peak of just over ,200 that was achieved in expand of fears over a systemic debt accident in the European Union. Implicit within the current market valuation is an assumption for hereafter growth in earnings per share.
By comparing the current market value for the S&P 500 index of nearly ,100 with the next four quarters of forecasted earnings per share for the index, it results in a forecasted P/E ratio in the middle of 15.0 and 15.5, assuming the forecasted earning growth unfolds as anticipated. Unfortunately, there are many factors currently in play that will make those growth targets difficult to achieve.
We believe that the stock market is poised for a sharp downward revision in the second half of 2010. This prediction is based on multiple factors that span fiscal, political, and underlying weaknesses in the prospects for hereafter growth of corporate profitability. Our mental forecast of a downward revision in 2010 is based on the following factors:
- The long-term capital gains tax rate will growth from 15% to 20% on January 1st, 2011. This will prompt many individuals and fund managers to capture gains achieved since the post-crisis lows at the more convenient current tax rate. As the end of the calendar year approaches, investors will need to anticipate when the sell-off to lock-in gains will begin or risk being caught in the depressed prices that effect from multiple simultaneous sales orders.
- Scheduled tax increases for 2011 will directly impact the disposable earnings for the top 53% of earnings earners. Since ~71% of Us Gdp is comprised of consumption spending, it naturally follows that a allowance in disposable earnings will effect in a spending compression. This is reinforced by the tight lending environment that is manufacture it more difficult for citizen to secure credit for the purpose of financing consumption spending.
- The government "deficit allowance commission" is scheduled to report after the mid-term elections in November. The motivation for this timing is clearly to avoid burdening incumbent politicians with the bad press that accompanies likely recommendations for reductions in spending and increased taxes. Both of these actions will have a negative impact on corporate profitability.
- Persistent high unemployment will make it difficult to maintain past levels of profitability that have been based on stimulus and subsidies from the government. As government entities stepping back from these programs because of large debt burdens and low tax revenues, corporate profits are likely to be impacted.
The aggregate of these factors originate a high probability of volatility in the stock market as 2010 draws to a close and 2011 unfolds. Investors who have diversified into cash are foreseen, to have 'value buy' opportunities in the advent months when reactions to economic news or strategic selling drives down the index values below the levels justified by fundamentals. However, the stresses on hereafter corporate profitability makes this strategic buying a more approved long-term strategy, since the regression back to fundamentals may be interrupted by erratic government course and added difficulty with European nations attempting to climb out from underneath their sovereign debt burden.
On balance, the uncut stock market presents a convenient value at an S&P 500 value near ,000. Volatility in expand of foreseen, tax increases are likely to present multiple opportunities for strategic buying at absorbing prices. The absorbing returns previously realized by 'buy and hold' investors have dissipated in recent years as the market has descended into a seemingly permanent state of volatility. In this environment, strategic value buying appears to be a more beneficial strategy.
To be prepared for the emerging market dynamics of 2011 and beyond, it may be wise to begin diversifying your funds before the revision in expand of higher capital gain taxes begins. It would also be advisable to whether hold onto your capital in the form of cash or money market funds if it is in an Ira or diversify into earnings properties if the capital is not constrained by a seclusion account. This will allow you to whether capture the foreseen, market revision and buy-in at lower prices or buy earnings properties at the current low rates and suppressed prices while locking in a 30-year fixed rate loan.
Is the Stock market Ship Going to Sink?