Has the US Stimulus had its day?

Has the US Stimulus had its day?

The US stimulus may have been great for global markets, including our own, but have the benefits to the ‘real’ economy been just as dramatic?

The impact of stimulus packages on the real world appears to be wearing off. By the end of September next year, 70 per cent of the 2009 American Recovery and Reinvestment Act’s $787 billion will have been spent.

According to economics forecaster Moody’s, US stimulus packages contributed ¼% in the first quarter of calendar 2009, 3% in the second quarter, 3.5% in the third quarter (now), and is forecast to contribute ¾% in the next quarter, 1½% in the first quarter of calendar 2010 and ¾% in the second quarter of 2010.

Translation? The Obama stimulus package is having its maximum impact on the ‘real’ economy right now. Data showing the recovery taking root is simply a function of this stimulus. According to Moody’s, this quarter is as good as it will get. The bad news is that from here-on-in, the stimulus will start to wear off.

Now, I am no economist. But there are several prominent experts, like Jim Rogers, who are warning another slowdown is about to occur that will make the recession the US just experienced look like a picnic.

I am equally poor at forecasting stock markets – you will discover over time that it just hasn’t been an essential ingredient in my own investing. But a friend of mine who picked the last market high and low to within a couple of days (please don’t ask me who he is or how he does it), tells me that markets have just seen their medium term highs and have begun another sell-off. This may or may not transpire of course, but he has always impressed me with his uncanny ability to get it right.

So we have some economic forecasters saying be careful, we have a market forecaster saying watch out and now here is my contribution…

I can tell you what a business is worth. I can also tell you that in the short run the stock market is a popularity contest, but in the long run share prices follow values. That’s why it is essential you know the value of the companies you are buying shares in.

When I aggregate all the company values I have estimated, I arrive at an estimated valuation for the All Ordinaries Index of just under 4000 points. This compares to a market that is 600 points, or 15 per cent, higher. That alone however doesn’t mean the market is going down. Valuing a company is not the same as predicting its price, and the reality is that Australia has over 3000 funds chasing less than 2000 stocks. This has the effect of creating a ‘normal’ state that sees the market above its valuation.

But above its valuation it is. So while I am very optimistic about Australia’s future and will never let short-term concerns about the economy or the market stop me from buying shares of great businesses when they are offered at attractive prices, right now I can’t find many great companies that are cheap enough to buy. And some people I have great respect for suggest I should be even more cautious in my optimism. Perhaps you should too.

By Roger Montgomery, 6 October 2009