US stocks traded in a narrow range for the month of April, closing with a loss of 0.63% in the S&P 500. Earnings and revenue growth were moderate but positive for Q1 2012, and are expected to accelerate as the year progresses. S&P 500 earnings are at record levels, and interest rates and inflation remain restrained, so US stocks remain 15% below fair value despite gains of 120% since March 2009. Average investors don't care, pulling $400 billion out of stock mutual funds over the last 4 years.
The US employment situation is improving, barely. Job growth had accelerated to about 3 million/year over the winter but now barely exceeds a rate of 1 million/year. 13 million Americans are unemployed. The US economy produces goods and services at record levels, but with 5 million fewer workers than in 2007. Productivity gains are good, but the creation of a permanent underclass of unemployed would be disastrous for the US. Such conditions have prevailed in Europe for 30 years, but the Europeans are willing to devote much more resources to a "social safety net." We have seen no reasonable solutions to improve the employment situation around in the US.
As we forecast last summer and again last November, Romney was confirmed in April as the Republican nominee for President. As we also wrote in November, "Obama is deeply unpopular, unemployment is high, economic growth is minimal and 73% of Americans think that the country in on the wrong track. Despite all that, we don't think that the Republicans offer a sufficiently compelling alternative in Romney, and Obama will be reelected."
The coming election promises to be the most dispiriting civil exercise in living history. Each side will spend hundreds of millions of dollars in attack ads to sway the opinions of handful of independents in these six states: Florida, Ohio, Virginia, North Carolina, Arizona and Missouri. National polls show Obama and Romney at a statistical tie, but we have often remarked, it's not the popular vote but the Electoral College that matters. At present, Obama leads "likely" and "leaning" states by 253 to 170 votes in the Electoral College. If Obama wins Florida (currently tied with Romney), or any two of the other five states, the election is over by 9PM EST on November 6th.
Under what circumstances might Romney win?
- Voters' perceptions of Romney at present are: 36.6% favorable/41.4% unfavorable, which reflects the "circular firing squad" nature of the Republican primary. By comparison, Obama polls 49.8% favorable/44.8% unfavorable. Romney reminds too many voters of the "guy from corporate who fired them." Can voters put this behind by November?
- Tea Party voters turn out despite their general diffidence towards Romney.
- SUPER-PAC money, alas one of the most corrupt developments of modern campaigning, favors Romney 20:1. The SUPER-PACs can attack Obama at will, but the Obama campaign can respond by painting Romney as the tool of the 0.001%.
- Unemployment surges. If average Americans can see their lot improving even if current conditions are poor, Obama wins. If the economy turns down over the summer, Obama loses. On that basis, we see Congress doing absolutely nothing to boost the economy over the next 6 months.
- Romney's V ice-Presidential pick ignites enthusiasm among Republicans and attracts independents and some Democrats. Possibilities include Senator Rob Portman of Ohio (low risk pick from swing state, won't overshadow Romney,) Senator Marco Rubio of Florida (Hispanic and Florida is key swing state,) Representative Paul Ryan of Wisconsin (Tea Party voters loved his budget proposal,) Governor Susana Martinez of Arizona (Hispanic and tough on immigration.) For sure, there will be no Sarah Palin's this time around.
The US stock market is at a crossroads. Valuation remains favorable with a discount of 15%. But with Americans still prepared to yank money out of stocks at the first negative headline, unemployment stubbornly high, and the outcome of the presidential still unknown, it's hard to make the case that investors should step forward. We will do what is hardest for investors to do, which is sit on our hands until we get information we can use, which might not happen until September. With gains in US stocks of 9.8% YTD in the S&P 500, we will spend time over the next few weeks rebalancing portfolios.