Less Bad = Some Good

Equities are ending the first quarter on a more optimistic note. This pertains not just because stocks are rallying today but to the fact that many investors stared into the abyss of the Great Depression II and came to the conclusion that a couple trillion dollars thrown at the world economy along with an era of better regulatory management and a most appropriate change/modification to mark to market will generate 2008 operating earnings for the S&P 500 at something north of $50.

Moreover, recent economic data suggest that the debt constrained US consumer will find ways to maintain some level of spending while apportioning a larger but not overwhelming portion of earnings to savings. Lastly, emerging economies are well positioned to assist in the global economy averting a worldwide recession, despite the pain emanating out of developed economies.

Perhaps this is the economic justification for the improving technical analysis readings of late.

Investment Strategy Implications

Perception is reality. And the perception that the end of world may not occur this year has led many investors to conclude that an appropriate P/E between 12.5 (bad times) and 15 (average times) applied to a $60 operating earnings number is where equities belong. And that gets to almost exactly where the market is today: P/E of 13.75 (average of 12.5 and 15) times $60 = 825.