Friday, October 29, 2010

One Reason for Recent Stock Market Rally: Corporate profits' big climb

I have had a very busy week meeting with clients and prospects, which I have enjoyed. There have been a couple of themes that have come out of these meetings, which I thought were interesting.

One of the major concerns for most investors is coping with low interest rates. Money market rates are essentially zero, which makes it painful for savers. One client I met with yesterday has over $500,000 in a money market fund which, as he pointed out, means that he's earning $500 a year on his account - ouch!

The other major theme might surprise you somewhat: Most of my clients are interested in adding to their stock portfolios.

We all know the economy is muddling along, at best. However, given the alternatives, stocks - especially large cap, dividend-paying stocks - can offer better yields and the chance for capital appreciation than corporate or municipal bonds.

The market has also had a good tone recently, which adds to the more positive feeling that my clients might have.

I came across this piece (tip of the hat to the Washington Post, via Politico ) that also was a little surprising: recent corporate profit growth has been the strongest in decades.

You don't hear a lot about this in the press: the Republicans don't want to give the Obama administration any credit, and the Democrats don't want to appear as helping corporate "fat cats".

And yet corporate America is flourishing.

Here's an excerpt from the piece:

Does President Barack Obama deserve credit for the fact that corporate profits have risen faster under him than during any other 18-month period since the 1920s?

“The better question is whether he wants the credit,” said Douglas Holtz-Eakin, who was an economic adviser to Republican Sen. John McCain’s 2008 presidential campaign. “Obama sounds a lot like he wants corporations to be less profitable.”

Profits have surged 62 percent from the start of 2009 to mid-2010, according to the Commerce Department. That is faster than any other year and a half in the Fabulous ’50s, the Go-Go ’60s or the booms under Presidents Ronald Reagan and Bill Clinton.

Under another president, especially a Republican president, the data on corporate profits would be envied. George W. Bush, who dedicated a good deal of his presidency to tax cuts aimed at boosting business profits, probably would have loved such results. It took Bush nearly four years to post the gains that Obama has managed in less than half the time.

Read more:

Corporate profits' big climb - John Maggs -