It feels like it is time for a little what-if analysis on the Stock Market and on the Economy. Where will the value of the Standard and Poors 500 be at election time in 2008? What kind of returns might we expect in 2008?
What if the recession is mild, or what if we just have a slow-down? Under this scenario, a TBill rate of 3.5% and a 10 year Treasury rate of 5.5% ought to be good discount values. What if that suggests a fair P/E factor of 18 times earnings? And what if the earnings on the S&P 500 is about $104? Then a fair value of the S&P 500 come November could be on the order of 1870. That would be a 35% increase from current levels.
What would support this happening?
1. The FED needs to cut interest rates. What if they cut rates by 50-75 basis points right now?
2. From a technical perspective, the market is making a triple bottom going back to August. It has been 66 trading days since the top in October. The correction from top to bottom is over 200 points. The market appears to be oversold and ready to rally.
3. With FED support strong enough to overcome a recession, and with the market technically oversold, the market could rally to new highs, significantly above 1576 on the S&P 500.
What are the caveats?
1. High oil prices.
2. A weak dollar.
3. Continued inflationary pressure.
4. Terrorists.
5. Insufficient or inefficient fiscal and monetary stimulus.
6. A scarred and scared consumer.
Well, the answers are never easy, but it looks to me that the potential for a good return in the market this year is there.
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