The financial crisis in Europe has detracted from a normal focus on the underlying strength of the US and global economy. Despite the US economy being relatively solid, an escalating Eurozone crisis has the potential to derail economic growth because of the enormity of the impact from a financial seizure. While the solution to the Eurozone liquidity and structure crisis is being debated, there continues to be very resilient economic data from the rest of the world. US GDP data is set to recover towards the 2.5%-3.0% range based on the strength coming from retail sales, manufacturing, and the labor market. It is relatively rare for the market to have a flat year of returns when earnings grow sharply in a non-recessionary environment. Clearly, valuation multiples for the S&P 500 have come down significantly. Perhaps this is setting the market up for stronger returns in 2012, provided the global economy and corporate earnings can continue to grow at a decent rate.
As Warren Buffett has said:
“Price is what you pay. Value is what you get.”
Right now, the market is offering better value which makes it apt to rally when one of two things happens:
- The Eurozone crisis starts to feel a little less “crisisy”
- Strong macroeconomic data is received around the world
Manufacturing new orders are a subcomponent of the overall ISM Manufacturing Survey. New orders are an important leading indicator because a manufacturer order starts (or continues) the process of economic activity. Commodities are demanded, materials are procured, ships, rail, and trucks are set in motion, and there is labor required throughout the process. ISM new orders have an 85% correlation to US GDP. The new order index reached 56.7 which is the strongest reading eight months, and consistent with strong economic growth.