Higher GDP Than Expected in Q4

A nice explanation from Calculated Risk:  about the numbers behind the expected increase in 4th quarter GDP this year.

"From the WSJ: Economy Poised for Growth Spurt, but Risks Abound {Subscription Required} 'Forecasting firm Macroeconomic Advisers on Friday raised its estimate to 3.7%, from 3.5%, while Goldman Sachs has raised its target to 3.4% from the 2.5% it was predicting two weeks ago.  Nomura Global Economics lifted its target from 3.7% to 3.9%, which, if achieved, would match the fastest quarterly growth of the recovery.'

It does look like GDP growth will be slightly above trend in Q4, but this is still weak growth considering all the slack in the economy. Back in Q4 2009 and early 2010, real GDP increased at around 3.8% annualized for a few quarters, but almost all of that growth was from increases in private inventories (a classic inventory cycle). This quarter most of the increase will be from final demand.

However some of this "growth spurt" is just a bounce back from earlier events - auto sales have finally recovered from the impact of the tsunami, and consumer and business spending have bounced back a little from the threat of a U.S. default in August during the debt ceiling debate.   And recently personal spending has been increasing faster than personal incomes, and the saving rate has been declining. That isn't sustainable.

Also, there are significant concerns about the first half of 2012 both from the European financial crisis and from fiscal tightening in the U.S. (fiscal policy in the U.S. will subtract from GDP in 2012 even if the payroll tax cut is extended)."

My Comment:  All that being said S&P 500 earnings for 2012 right now are clocking in at an estimated 100-102 per share.  These so far are not pie in the sky numbers but reflect roughly about 7% earnings growth for next year.  That number is also a traditional rate at which earnings grow.  At 1224 where the S&P closed yesterday that reflects a market trading with a forward PE of between 12 and 12.5 next years earnings. Assuming these numbers are good{and that could of course change over time}, then stocks could show a potential return from here between 6% and 25% next year.  That last number assumes that everything goes completely right for the market in 2012.  That return doesn't include dividends.  A good 4th quarter is a nice tailwind as we head into 2012.

Now as always there's a lot that could go wrong with this market and there is no law that states these numbers won't get cut or that Europe won't trump valuation again next year as it has here since this summer.  But a market trading with a yield in excess of 2% with short term rates well under this number and an earnings yield of nearly 8% points to a market that is cheap by historic valuation standards.  We'll see how it goes into the new year. 

Link:  Better GDP in 4th Quarter.

*Long ETFs related to the S&P 500 in client and personal accounts.