Stocks Versus The Economy

If you’ve read our two most recent Monday Morning Outlooks, you know we raised our forecast for the S&P 500 but lowered our forecast for real GDP growth. How can that be?

The first thing to recognize is that when we say we’re bullish on stocks that doesn’t mean we think the stock market is going to go up every day, every week, or even every month. It won’t. Nor does it exclude the possibility of a correction in equities, which based on historical frequency is past due.

We take a fundamental approach, valuing time in the market over trying to time the market. Corrections will happen from time to time, and we don’t know anyone who can accurately forecast them on a consistent basis.

Without digging deeply into our capitalized profits model which estimates a fair value for stocks as a whole, we remain bullish for three main reasons. First, long-term interest rates are low and are likely to remain relatively low for at least the next year. Second, corporate profits are very high and will remain relatively high even if they pull back from record highs as the amount of government “stimulus” wanes.

Third, even if real (inflation-adjusted)…