Plenty of Reasons to Stay Bullish on Stocks

by: Jon D. Markman

There has been a lot of hand wringing and tongue clucking about the latest revision to U.S. gross domestic product (GDP). But the reality is that the third-quarter U.S. GDP data isn't as important as most people think.

In fact, there are plenty of reasons to remain bullish on stocks.

The second read on third-quarter GDP growth came in at 2.5%. That is nothing like the 9% growth of China, the 8% of Singapore or the 5% growth of Thailand. It's not even like the 4% growth that we expect from of a full-strength U.S. economy. However, forward indications of economic growth suggest the economy is stabilizing.
The Economic Cycle Research Institute's Weekly Leading Index (WLI) up-shifted again in the week ended Nov. 12, logging in at -4.5%. That's an improvement from -5.5% the week prior. This is great: nice and steady.

You may recall that pessimists pointed to this measure as it was coming down back in the springtime to explain why they believed the U.S. economy would return to recession in 2011. But now they'll have to shift to another excuse, because the index is inching toward positive territory – even as most economic indicators such as durable orders and home sales are treading water.

The beauty of the WLI is that it uses a non-linear formula to look around the corner and see what's coming. All that the current data does is tell you what just happened. It's good to know what happened, but looking forward is what successful investing is all about.

Furthermore, great companies require only a minimal amount of growth in the U.S. and global economy to succeed. Overseas revenue and cost cutting and efficiency gains have helped corporate earnings to advance as the economy has weakened.

Cognizant Technology Solutions Corp. (Nasdaq: CTSH), Mettler-Toledo International Inc. (NYSE: MTD), Ross Stores Inc. (Nasdaq: ROST) and Waters Corp. (NYSE: WAT) are just a few companies that have created enough operating leverage in their business models to generate steadfast cash flow and profits.

The bottom line: Earnings and interest rates are the two most important factors in determining stock prices. And right now both are bullish. So is Wharton finance professor Jeremy Siegel.

"Earnings are higher than expected. Interest rates are lower than expected," Siegel said last week. "So, when I look at the fair market value now of the market, I see it appreciably higher than our current levels, and I can easily see the market growing 10% to 20% over 2011. And, by the way, I even see a nice gain through the end of 2010."
Siegel believes that with most of the cost cutting done, stocks will make their run on the back of increased consumer spending.

"If firms can make profits with sales being as sluggish as they've been this year, think how much profit they'll make if sales start going up," he said. "So, corporate America is levered up in such a way that when we do get that boost in spending, which I think will come in 2011, we will definitely get more profits."

All things considered, I'd have to say that I agree.

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