Tuesday, March 6, 2012

Valuing Common Stocks

The smart money is still bearish. With the Dow Jones hovering just below the 13,000 level, the financial pundits are almost unanimous in their bearish outlook. The exception to the gloom is the optimistic view of the sell side -- the brokers. They like the market here, but then, they pretty much always like the market. It comes with the territory (that is, the job).

So, are the bears right? Is the party over? Is it time to take a pause?

First a caveat. The only honest answer is that no one really knows, no matter how convincing one's argument may be.

That said, my guess is that the pundits are wrong. Common stocks will likely be much higher in value ten years from now than they are now. It would not be a surprise to see stock performance exceed historical levels over the next ten years, which would mean a Dow Jones of over 30,000 by 2022.

But what of the next twelve months? Will the market conveniently sell off or pause to give the late-comers an opportunity to climb aboard? I doubt it.

That doesn't mean that the economy is set to take off. It isn't The economy will continue to plod along with high levels of unemployment and very slow economic growth. Businesses will continue to find ways to avoid employees and taxpayers will look for ways to avoid the tax hikes that everyone knows are likely to be in our future. This means continued economic stagnation, albeit a slowly expanding economy.

This is not an economy that provides opportunity for those with limited economic means. That has been effectively precluded by government policy. But, it is an economy that benefits those who ride on top of the stagecoach. Their ride will get better, stocks will go higher. The Warren Buffetts will do well (and they won't pay higher taxes, even if they face higher tax rates).

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