an tSionna {01.20.12}

Here's an updated chart on the S&P 500.  In regards to our earnings targets for last year, I thought I'd do a quick review.  We started the year in an essay on whether stocks were cheap by thinking that stocks could trade by year end 2011 between 1350 and 1400 on the S&P 500.  We lowered that end of year projection back in early October to a range of 1250-1300.  The S&P 500 reached its high water mark for the year in early May when it closed at 1362.  From there stocks declined almost 20% into the fall and ended virtually unchanged around 1260.  Since October, stocks have retraced much of that decline and are now trading around 1315. 

Humans divide time periods into things like years and decades but markets are not bound by such things.  They will get to where they need to be in fits and starts {both good and bad} and only a higher power {or randomness if you don't believe in such things} knows when that might occur.  There may have been artificial constraints such as tax selling and year end window dressing that held the market back in the last few weeks of 2011.  Certainly there has not been enough different news so far that warrents why the market would have kicked up over 4% since we've turned the pages into 2012.  Ultimately things like valuation and fundamentals matter to investors.  Stocks came into this year cheap, trading somewhere between 12-13 times what ought to be the final S&P 500 earnings number for 2011.  They have simply now started to play catch up to where they likely should have been a few weeks or months ago.

Back in that December 2010 piece linked above we said the following: 

"One final thought. If we assume that the economy continues to grow at these projected rates then you are looking at 2012 estimates of potentially $100 and $104. Should these numbers come to pass then you are looking at fair value estimates out there of $1,350-1,550 by year's end 2012." 

If anything consensus estimates are even higher now for 2012, so we'll stand by that range for now by year's end with a current midpoint estimate of 1475.  We'll detail how we are getting there and introduce a 2013 estimate at a later date.   

From where we started the year, a market that has the potential to trade around 1475 by year's end has the potential to increase about 17% on a price basis.  If you add in expected dividends for 2012 and dividends received in 2011 and divide that return by two {in order to make up for our basically lost 2011}, then stocks over that period of time have the potential to compound at around a 10% rate for both 2011 and 2012. 

We'll see what happens.  More on this subject soon.

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