Stocks still attractive, despite weak economy for years to come

Now here is something we can agree with..

Is the Stock Market Cheap or Expensive?
By John Curran

The great financial question confronting the American public lately has to do with their withered investment portfolios. After the government’s huge stimulus package there is relief that the financial crisis seems under control, but there is also a lingering suspicion that economic malaise may be here to stay, even if big outfits like the Organization for Economic Co-operation and Development say otherwise. (On Wednesday, the OECD joined the list of optimistic forecasters, saying that economic growth would return in 2010 and be better than it had expected just three months ago.)

And that leads to a big question about the stock market, which has already run up more than 30% on the hunch that an economic upturn is imminent, but is lately exhibiting second thoughts as trading volume sinks and major indexes slip down through technical support levels, one after another. So investors rightly ask: Is it foolish to be buying stocks now, after the market jumped so high on hopes alone? (See pictures of the top 10 scared stock traders.)

The good news, at least from one perspective, is that despite the market’s run-up and the still soft economy, stocks remain on pretty solid ground. So says Leon Cooperman who runs Omega Advisors, a New York hedge fund. Cooperman spent decades guiding the investment policy committee at Goldman Sachs; he’s long been considered a tough-minded analytical sort with a savvy gut instinct. (Read an interview with 2008’s No. 1 stock picker.)

Late last week Cooperman laid out his views to a packed room of securities analysts and hedge fund managers in Manhattan. He noted the power of big federal spending, and expressed concern that Washington’s largess, if unchecked, will fundamentally alter America’s competitiveness. But he also made clear his view that the last rounds of federal spending have averted crisis and set the stage for a shallow economic recovery with modest inflation. Longer term, he believes the U.S. will be growing at only 1.5% to 2% a year, well below the historical growth rate of 3%, a shortfall resulting from ongoing consumer deleveraging and frugality, and slow growth in business credit.

But with interest rates remaining low, Cooperman says, the value of stocks is appealing. Indeed, whether measured against Treasury bond yields or corporate bond yields, he says, the stock market appears not only fairly valued, it may even be relatively cheap. And with the darkest hours of the financial crisis now behind us, so too, Cooperman believes, are the stock market lows of last March, not likely to be seen again anytime soon. “The lows [of this stock market cycle] are in,” he flatly told his audience. He then repeated the line with gusto, as if to jog a crowd still paralyzed with fear from the losses suffered earlier this year.

Stock market valuation is an inexact science, and it offers no guarantee that the market will not correct sharply after its big run up. Indeed, even Cooperman expects the months ahead to be characterized by a trading range market, with a lot of backing and filling. But in fits and starts, he believes, it will edge higher over the next 12 months. Perhaps it’s a mark of these unusual times that such a modestly bullish forecast felt bold; it’s also a mark of these times that professional investors are just as skittish about the market as the little guy.

If history is any guide, such pervasive fear isn’t bad — stocks have no problem climbing a wall of worry.