Stock Market: Improved Consumer Confidence Spells Better Tidings
The Conference Board Consumer Confidence Index surged to 64.5 in December from 55.2 in November. This has for the moment removed a serious headwind for U.S. equities. As shown below, the close relationship between Robert Shiller's Cyclically Adjusted Price Earnings Ratio, or generally known as PE10, and the Consumer Confidence Index since 1998 indicates that the S&P 500 Index (SPX 1260.71 ↓-0.18%) is correctly priced at a PE10 of 20.8.
While 2012 will probably continue to see wild gyrations on stock markets, I am of the opinion that the U.S. economy will gradually improve over the next 12 months. I expect consumer confidence to reflect the better economy and work its way higher to the 80 level by year-end. In light of this improvement, I will not be surprised if the S&P 500's PE10 reach 25 by the end of 2012. This implies a target for the S&P 500 of 1,518 by the end of 2012 - 20% higher than the current 1,263.
But the road ahead will continue to be bumpy as the stock market indices are not at bargain levels, as seen from the Shiller PE10 graph below. In short, the market behavior of the past few days has been fairly constructive, but still somewhat inconclusive (as conveyed in my podcast of two days ago). I believe it is appropriated to have stock market exposure, but will for the time being still err on the side of caution by favoring the dividend paying Aristocrats or ETFs investing in these stocks.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
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