Are Stocks Cheap or Expensive?

Posted: August 30, 2010 in Technology and Business
A few articles came out today (AP; WSJ) about stocks being dirt cheap… because projected P/E ratios are as skinny as they were during the March 2009 lows.
 
The counter to this is the number is low because projected profits are unrealistically high.
 
What am I looking at?  Comparisons.  Q1/Q2 2009 was absolutely awful… so Q1/Q2 2010 looked pretty good in comparison. 
 
But Sep/Oct/Nov/Dec 2009 rebounded fairly impressively… which should be ok for Q3 comparisons (Jul and Aug 2009 were still pretty weak)… but is going to make Q4 2010 comparisons a challenge.
 
Oil prices — in this situation — aren’t much help.  Normally lower oil prices mean a bit more money in people’s pockets and, thus, more spending and more corporate profits… and higher oil prices means folks start clamping up again and, thus, less corporate profits.
 
But oil prices seem to be able where they were last year… in the 70’s. 
 
And we know more spending money isn’t coming from brand new shiny jobs or home equity appreciation.
 
So, in general, I’m not sure where the extra dollars are going to come from to fuel the anticipated spending growth.
 
Interesting enough, Intel already lowered formerly raised profit expectations on Friday…. which would support that observation.
 
With oil inventories sitting at all-time highs, though, there is still a chance oil prices will start to drift downward… and that, of course, will make corporate profit growth estimates more likely. 
 
In fact, a downward oil trend may be particularly bullish for stocks in Q4 2010/Q1 2011 given oil prices started climbing into the 80’s in Q4 2009, touching the 90’s in April 2010. 
 
In other words — comparatively speaking — people may actually have a bit more in their pockets to spend.
What will happen?  Watch oil prices over the next few months to find out.
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