After peaking in April, the S&P 500 lost 4.8% during the May-July period.
Over the late spring and summer, the market reacted to growing uncertainly. Consumers pulled back on spending due to weak job growth and elevated gas and food prices. Supply chain disruptions from the Japanese tsunami and Mississippi floods slowed manufacturing. Investors grappled with uncertainty surrounding European debt and Washington's struggles to come to grips with our own debt worries.
So with all the doom, gloom, and panic, is there a reason to buy U.S. stocks?
We think so.
Most companies have reported second quarter earnings that have beaten analyst estimates. While a few forecasted slower growth for the balance of 2011, many have increased or left their forecasts unchanged. This largely confirms our experience with the companies we follow. Analysts expect aggregate earnings for the S&P 500 over the next four quarters of about $105. The close for the S&P 500 on August 12, was 1,179, implying the forward P/E ratio for the S&P is 11.2. This is inexpensive.
While the risk that a double-dip recession is higher now than a few months ago, we don't think that corporate earnings will fall off the table. Since earnings eventually drive stock prices, we like the risk/reward balance from owning stocks over that of low-yielding bonds.
Watch for the October 2011 issue of the Investor Advisory Service, to be published on September 23, 2011, for our next top three stock picks for these times. If you're not already a subscriber, subscribe with this special offer before September 20th in order to receive the October issue and a full year's worth of high-quality stock selections.