Turns Out This Recovery May Be For Real

There's more to it than the naysayers acknowledge.

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David B. Armstrong

We’ve had 18 straight weeks of good economic news, and the news from last week was very impressive. Unemployment is down from 8.5 percent to 8.3 percent, non-farm payrolls surged to 243,000 vs. an expected 140,000, vehicle production is up, and consumer confidence is on the rise.  

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Eighteen straight weeks: That’s pretty darn good when you consider that everyone was screaming double-dip recession and we saw close to a 20 percent drawdown in the equity markets in the late part of last summer.

It’s far from perfect (I know). The unemployment rate is still pretty high. There are still a lot of people out of work, employed in jobs way beneath their skill level, or no longer looking because they are so discouraged.

So it’s easy to think that things are still bad. But let’s not let that gloss over the fact that things have gotten better since last summer.

Real Gross Domestic Product (GDP) has grown for the past 10 quarters. Profits at Standard & Poor’s companies are still doing well, and with over half of them reporting their fourth quarter 2011 numbers, 54 percent have exceeded their revenue estimates and 60 percent have exceeded their earnings estimates. If the world was falling apart in the third quarter, it sure didn’t show up three months later in fourth quarter reporting!

In fact, consensus estimates for the S&P 500’s forward 12-month earnings stand at $106 per share and have hardly moved over the reporting season. That means the forward price-to-earnings ratio is at (a VERY reasonable) 12.5x. The historical 15-year P/E ratio is more like 16.9x. This indicates that the S&P 500 may still be at a very favorable level.

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The Institute for Supply Management (ISM) publishes two monthly reports that are used to determine the health of both the manufacturing and non-manufacturing sectors. The index readings are used as a barometer, and any reading above 50 means the sectors are expanding.

The January readings were 54.1 for manufacturing (up from 53.1 in December) and 56.8 for non-manufacturing (up from 53 in December). That signals that the economy is STILL moving forward and gaining speed month over month. 

This leads me to wonder how much of the doom and gloom from the naysayers is being driven by politics. I remember back to 1992 when the economy was improving but everyone who wanted President George H.W. Bush out of office refused to acknowledge that things were getting better. They were so blinded by wanting him out of office that all they could see was the bad.

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I wonder if that is playing out again now? There are a lot of people trying to oust President Obama. Is it possible that they are tricking us into focusing on the negatives about the economy despite the clear facts that it is improving?

Probably.

So here’s what you should be doing. Formulate an investing strategy and stick to it. Base your investment decisions on either your immediate need for liquidity or on a long-term strategy within a complete financial plan, despite any fear or anxiety you may feel.

And if you don't have a plan, please get one in 2012.

David B. Armstrong, CFA, is a managing director and cofounder of Monument Wealth Management, a full-service wealth management firm in Alexandria, Va. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All performance references are historical and are not a guarantee of future results.