Our Investment Policy Committee spent most of last week's meeting discussing whether or not the stock market may be at an inflection point that could lead to significantly higher prices. There were five key points running through our discussions.
- 80% of S&P 500 companies beat their earnings estimates for the fourth quarter, much higher than expected.
- Fourth quarter US GDP growth significantly exceeded expectations at 5.9%.
- Economists surveyed by Bloomberg are now estimating 3.0% GDP growth for 2010, up from 2.5% at the beginning of the year.
- Fed comments continue to paint a benign picture for inflation, meaning that rate hikes are not likely before the end of the year at the earliest. Economists are still forecasting that core inflation will be 1.3% by year-end 2010. This benign inflation data flies in the face of the gold bugs and those who believe that runaway inflation is a foregone conclusion.
- The price action of General Electric (GE) is impressive.
These five points do not suggest that stocks will soar again in 2010 like they did in 2009. The reason is simple: we could just as easily assemble another list containing at least five powerful negative forces facing the market. Yet, investors are certainly aware of all of the negatives, and because of this we believe the price action of GE in recent days is an important signal.
GE has been in the middle of the financial crisis, and for it to power to a new post-crash high (see chart above) is big news. We've watched price graphs long enough to know that some very big money has just made some very big bets that the news for GE is going to get better over the coming months.
Additionally, because GE's business is so multi-faceted, there is reason to believe that good news for GE is probably good news for the whole economy and stocks.
Interestingly, GE had a couple of big days right after their CFO announced that the company was considering a dividend hike in 2011. In this regard, their message is similar to the one we suggested in last week's post about the banks. That is, companies, even companies in the financial services sector, appear to feel comfortable with their current levels of capital reserves. When GE starts talking about dividend hikes, it sends a clear message: they don't have any dilutive equity capital underwritings in the works. That is good news, but even more importantly, if they are talking dividend hikes, it follows that they must see an end to their loan losses. That's even better news.
Author's disclosure: We own GE.