Just as this time last year fear has gripped the stock market. We're staring at a 10% correction since the start of January. The latest fear is potential defaults on sovereign debt from countries including Spain, Greece and Portugal. In addition, the employment situation appears stagnating and long-term global growth prospects are waning.
The chances that we will see a wave of sovereign debt defaults is remote given the nature of global finance and the fear among other nations of 'contagion' - or a spreading of the crisis. The slower growth in the effected nations, however, is a real possibility. But even then, these nations only represent a small fraction (about 3%) of global GDP output. The biggest risk is to sovereign bond funds, not U.S. equity holders.
In addition to these headlines, the doomsday prophets are foretelling of a collapse of the real estate market in China, the U.S.'s growing deficit and looming tax increases and local and state government debt issues. All told, these issues will scare even the most bullish investor.
Fundamentally, the markets are driven by earnings, which rely both on access to capital and growth of capital. Right now earnings are growing at a pretty good clip, with companies exceeding estimates by 3 to 1. Investors are betting this will not continue.
I'm sticking with my long-term forecast that we will see continued growth in earnings this year, fears will ease and the stock market will rebound. If I had to call a bottom to this correction, I'd put the S&P at about 950, which would put us at an average price-to-earnings multiple of 15 for last year and the coming year (assuming earnings estimates are accurate). If earnings continue to outperform, I expect job hiring to resume and the market to rally back to above 1200.
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