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Bubbles and Busts

May 16, 2011 – 5:07 pm

Barron’s in their weekend paper reported that out of 456 companies in the S&P 500 that have reported earnings for this most recent quarter 76% have beat their expectations with earnings growth of 19%, a full 7% more than the experts had thought. There have been many quarters in a row of double digit growth and most analysts think that it will continue into 2012. Also, in that same article Thompson sees the forward P/E for the S&P 500 as 13, below the long term average of 15.

These and other facts support a rising market. The economy is growing though it slowed in the first quarter. However, more current data suggests growth is picking up again. It will not become robust growth as the housing market is not improving and in past recession recoveries construction
would normally add 2 to 4% to GDP.

The dangers to continued economic expansion are debt for the various economies around the world, including the U.S., inflation in the emerging markets, but not in the U.S., and the Middle East as it struggles with unrest in various oil producing countries.

There is always worry and a rising stock market always works best when fear retards exuberant traders. That does not mean we won’t have corrections. They are a sign of a healthy market. It’s the absence of fear and corrections where bubbles reside and every bubble is followed by a bust.

Good Trading
Steve Peasley

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