A Case for Buying Stocks

Posted by: Ben Steverman on June 5, 2008

Stocks rallied today. One portfolio manager said it was mostly just a “relief rally,” a bouncing back after bearish news earlier in the week.
But to put you in a more optimistic mood, check out something John Wilson of Morgan Keegan wrote this morning. He was summarizing a note from Thomas Trantum:

Most recent data shows that corporate profits in the first quarter hit a record $1.157 trillion. To put that in perspective, at the high water market in 2000, corporate profits hit the amazing level of $602 billion.

OK, let’s do some simple math. As the economy has deteriorated and the press has harped on how bad things are, corporate profits are up on the order of 92%. Meanwhile the S&P 500 is about 10-12% below where it was at the 2000 peak. By definition, valuations have shrunk. With the Fed Model showing stocks 45% undervalued to bonds, I have to believe that the risk/reward ratio is heavily on the side of stocks.

For more on the data behind the conclusions, check out Trantum’s note.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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