In October 2008, Warren Buffett wrote that "if you wait for the robins, spring will be over." In other words, by the time the economy will look healthy again, stock prices will no longer be cheap.
Despite the pessimism, which is trendy these days, there are already plenty of robins around.
The unanticipated disappointments we all experienced over the last two years have darkened the mood. People are more cautious. Growth is considered feeble and many worry about a possible double dip recession. But there is some good news that's generally overlooked.
First, corporate earnings are getting better. 30% of S&P 500 companies have exceeded prior peaks in earnings per share. Noticeably, many companies in different sectors are reporting very good numbers. Capital goods companies such as Caterpillar, Boeing and Intel are seeing their stocks at 52 week highs. Those companies sell expensive equipment and cannot do well without their underlying customers' prospering.
Second, more companies are hiring, albeit slowly and cautiously. In March, payroll jobs increased by 162,000. It was the largest increase in three years.
Third, as the economy changes its focus from consumer spending and housing to services and high skilled manufacturing, new sectors are becoming dominant. But major industries that have been ravaged by the Great Recession are due for a comeback. Moody's Economy.com estimates that the underlying need for housing (new household formations) runs about 1.85 million units a year. Meanwhile, new home construction is only about 600,000 a year. We are obviously working off the excess inventory from the boom years. But at some point the excess will be eliminated, and housing prices are bound to stabilize.
The automobile industry works similarly. Car sales were over 16 million in 2007. In 2009 they were down to just over 10 million. At some point normalized demand will be back.
And the purses of consumer spending are already loosening up. If you doubt that, just look at the robust sales of iPads, which is undoubtedly a luxury item, and not a cheap one at that.
And finally, merger and acquisition activity is back in a big way. Companies and investment funds are again willing to spend and gaining confidence in their ability to finance acquisitions.
The last two economic expansions have lasted seven and ten years. This expansion just started. The March 2009 stock market nadir was very likely a generational bottom. This doesn't mean the markets cannot have a pullback. In fact we are probably over due for one. Until Friday, stocks went 51 days without a 1% decline in the S&P 500. That unusually long buying streak is the longest in 16 years.
We will very likely see many market pullbacks. But the future is still bright. This country has weathered bigger trouble, and always found the appropriate coping mechanisms. While America has some long-term problems such as budget deficits and public debt, it is still the most innovative country, the wealthiest and the one with the most solid rule of law. American democracy is still envied by most of the world's population. The pervasive pessimism creates an adverse impact on the economy, but it is unjustified. When people realize things are actually improving, it could create a positive upside surprise.
Start your workday the right way with the news that matters most. Learn more