As U.S. stocks hit record highs in the first half of 2013, some commentators raised concern that our markets are entering another “bubble.”
However, when BWFA’s investment team examined the state of the U.S. economy and the condition of our stock markets, we disagreed. We think the stock market has correctly identified good reasons why the U.S. is the place to invest your money.
We recognize our nation still has serious economic issues to address. Unemployment is high, economic growth is too slow, and our national debt is large and still growing. Meanwhile, our government remains dysfunctional in many ways.
Yet, while these news items dominate media attention, our press has a tendency to emphasize the negative. There is plenty of evidence of a strengthening U.S. economy and continued solid returns on U.S. investments: reasonable stock market valuations; strong private sector growth; low and stable inflation; and more.
Our stock markets today are reasonably priced by historical standards. With the S&P 500 trading at a price-to-earnings ratio of 15 to 16, we are not overextended.
Furthermore, fixed-income investments, such as CDs and bonds, are offering returns that are pathetically low. Those low returns make stocks inexpensive in comparison, when we look at the “cost” to purchase different investments with different expected returns.
Strong Private Sector Growth
Despite talk of cumbersome regulation, the U.S. economy and labor markets are the most dynamic in the world. They have adjusted to changing conditions and are positioned to deliver results to investors.
Our private sector has responded to the Great Recession and is once again in great shape. U.S. companies are now extremely productive and profitable. The S&P 500 has achieved record profits two quarters in a row.
Manufacturers now complain they have 3.5 million unfilled jobs. Consider automakers as an example of the rebound. Before the recession, they were losing money building cars that many people did not want. Today, they build high-quality vehicles and have good profits.
Manufacturers have another advantage: abundant supplies of energy produced within our borders. U.S. manufacturers benefit from access to energy that is less expensive than energy for competitors in Europe and Asia. Not only will our manufacturing and transportation industries benefit from lower energy costs, we will also hire more American workers and keep the profits at home.
Big banks have rebounded, too, and they now have strong capital positions. Over-leveraged banks were of the reasons we suffered through the Great Recession, but over the last five years they have improved their balance sheets and now provide a safer environment for investors than do European banks.
More Good News
There’s more good news, too. We have a low and stable rate of inflation. Stable prices create a powerful platform for business and consumers, and they protect the value of long-term investments.
As awareness of these positive trends has increased, we are finally starting to see Americans regain their confidence. Consumer confidence readings have begun to improve. Housing sales and construction are rising, retail spending has improved, and people are buying cars.
Finally, the rest of the world has recognized the strength of the U.S economy and has begun to invest their money here. With strong flow of funds into our markets, the U.S. continues to be an excellent place to invest your money.
 Based on annualized earnings for the S&P 500 for the quarter ended March 31, 2013.