Fair Winds

By Paul Wright, CFA.

The Congressional Budget Office now estimates that the 2013 federal deficit will be just $642 Billion.  That’s still about $4,000 in new debt for every American under the age of 40, but it’s a vast improvement over last year’s $1.1 trillion.  And the deficit for 2015, two years from now, is expected to be just $378 billion.

The red ink will climb rapidly again when the bulk of Baby Boomers have entered retirement, but it will be years before investors again worry about the federal debt or a European-style panic.  And in those years you can expect moderate inflation (that reflects persistently high unemployment) and solid growth in corporate earnings.

We’re now forecasting that the economy will grow at a 2.5% rate in 2014, and that  nominal GDP—that is, GDP that hasn’t been adjusted for inflation—will grow at a 4.5% rate.  It’s the growth of nominal GDP that matters to investors, because that’s how fast the US sales of large corporations grow.

That’s not all.  These companies will probably see faster growth from their overseas operations, and earnings per share will continue to grow a good bit faster than earnings because so many companies have been buying back shares at bargain prices.  Put it all together, and the companies of the S&P 500 should be able to produce 6% growth in earnings per share, and another 2% in dividends.

The result is our forecast of an 8% annual return on stocks, from now to 2017, even if the price-earnings ratio on stocks stays right where it is.  That PE ratio has been far too low for this level of interest rates, because shell-shocked investors have been holding too much in bonds and cash.  In the late stages of this long bull market they will almost certainly push stocks above fair value . . . Those who were able to overcome their fears the earliest will benefit the most.


The S&P 500 index—now at an all-time high of 1,600—hasn’t gone much of anywhere in the last 12 years, but in 1990 it was at 340.  In 1974 it was at 63!  That is, it’s multiplied 25 times in 39 years, and in every one of those years the companies within the index paid dividends.



The Dow Jones Industrial Average has multiplied 153 times—not including dividends!!—since 1942.

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