The news from Europe seems worse by the minute as negotiations between Greece and international lenders continue to drag along, leaving investors to wonder whether stocks can remain oblivious to the overseas situation.
According to Jack Ablin of Harris Private Bank, stocks are actually pricing the European crisis in, and that's the only reason we aren't up even more than we are. By Ablin's math, international turmoil masked a recovery story in the U.S. that should have pushed domestic markets to near double-digit gains in 2011.
"With earnings growth the way it was and revenue growth the way it was, I think the S&P500 should have been up about 9.5% in 2011," says the chief investment strategist in the attached clip. The under-performance on the equity side of the asset class equation has Ablin scratching his head over some dislocations.
Pointing to GlaxoSmithKline (GSK), Ablin points out that the company's debt is actually yielding much less than its 4.8% dividend. This arguably isn't "supposed" to happen, the fact it is has Ablin chomping at the bit to get long. At least to a point.
With the lost gains of 2011 "in our pocket" Ablin says stocks could shoot to double-digit returns with a mere "nudge in profit growth" though he's quick to offer that he'd take gains and declare victory should such a move occur.
In the bigger picture, he's not blind to what's happening in Europe; he simply thinks the U.S. economy is much more able to handle a European recession than is widely believed. He says Europe is less catastrophic meltdown and "more like what happened to Japan over the last 20 years." In other words, it's a serious problem but one that can be factored in without dragging down the rest of the world.
"Economics is a social science; it's an allocation of resources," Ablin says. That being the case, more resources will be coming into the U.S. while the rest of the world struggles through the pain. It may not be a great bullish theme but it should be more than enough to keep the wheels turning over here.
Let us know what you think in the space below.