The future could be brighter than you'd ever imagined.
It's been too easy to be a bear over the past couple of years. We've been surrounded by doom and gloom, from the plunging stock market, to the disastrous economy, and high and rising unemployment.
Yet, unless you've been shacked up in a dark cave in Pakistan for the past 10 months, you'll be fully aware the stock market has gone on one of its most meteoric rises in history.
The FTSE 100 has soared close to 60% from its March 2009 lows. In the US, the S&P 500 has performed even better, up over 70% from its devilishly low point of 666.
No Surprises Here
To listeners of MoneyTalk, the Motley Fool's weekly podcast hosted by our own Wizard of Finance, David Kuo, the market's surge should come as no surprise.
Just over a year ago, popular finance personality Justin Urquhart Stewart told MoneyTalk listeners the stock market often falls prior to recession, and rises during the recession.
As we now know, Justin was bang on the money. In the darkest days for the economy and unemployment, the stock market flew higher. But that was then and this is now. I'll be covering Justin's outlook for 2010 in the coming days, but if you want to listen all for yourself, you'd do well to subscribe to MoneyTalk.
Three Reasons To Party
With the economy about to exit recession, the future is as uncertain as ever. But there is hope. For those people who prefer to see their glass as half full, there is more than hope. Indeed, there are three great reasons to be excited about the future, and to be excited about the future for share prices.
1) Inflation
Inflation accelerated in December by the most since records began in 1997 for this particular yardstick of rising prices. Again, this development shouldn't be surprising to regular Fool readers, as Warren Buffett told us way back in October 2007 that inflation was far more likely than an extended period of deflation.
The bears should forget about Japanese-style deflation. The coast is clear. But even better, analysts still believe interest rates won't rise until the final quarter of this year. In the meantime, we could be set for a period of relatively low inflation and record low interest rates.
If economists were the partying types, this scenario would call for a giant rave somewhere in the green fields of leafy Surrey.
2) Upside surprise.
Despite having its own problems, the US is still the world's largest economy, and where it goes, the rest of the western world follows.
So when Garry Evans, head of global equity strategy at HSBC (LSE: HSBA) says US shares may surprise on the upside this year after lagging behind 2009's worldwide stock rally, it pays to take note.
"People have got very high expectations for Asia already," Evans said on Bloomberg Television. "Contrast that to the US, where everyone is so bearish, it can only surprise on the upside."
Should the US surprise on the upside, expect the rest of the world to follow. Crack open the bottled water!
3) Valuations
The FTSE 100 trades on a trailing P/E of around 18. For a curmudgeonly old value Fool like myself, that is positive nose-bleed territory. The last time I paid 18 times earnings for a FTSE 100 company was last century!
Dig a little deeper however and you find a different story. On a forecast earnings basis, the valuation of these large FTSE 100 companies looks very reasonable. Add in interest rates at virtually 0%, and it wouldn't take much to get you very excited.
| Company | Forward
P/E | Forward
Dividend
Yield |
|---|
| BP (LSE: BP) | 10 | 5.7% |
| Vodafone (LSE: VOD) | 9 | 6.1% |
| Tesco (LSE: TSCO) | 13 | 3.3% |
| Marks & Spencer (LSE: MKS) | 12 | 4.2% |
Are you getting excited yet?
How about this then?
Over in the US, Michael Shaoul of Marketfield Asset Management said on Bloomberg "I'm getting sick and tired of everybody telling me to run away from the market because of P/Es. If we look at price to earnings alone, we say the market is overvalued. If we look at price to cash flow, we say that the market is incredibly cheap. The truth is probably somewhere in the middle."
More Bullish Fun
I'm in that "somewhere in the middle" territory. Although I remain very cautious about the economic recovery, I'm optimistic enough to realise things are getting better and in the longer term, UK Plc will steadily grow and prosper.
When you take into account the attractive valuations and dividend yields of companies like those mentioned above, you can see how being bullish about the future can be just as easy as being a bear. And a lot more fun too.
David Kuo and Maynard Paton over at Champion Shares PRO are cautious, yet optimistic about the future. They are in the very early stages of investing £50,000 of the Motley Fool's own money into high quality companies they believe will pass the test of time. Champion Shares PRO is open to new members for a strictly limited amount of time. Click here to get more information.
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