Much to Be Thankful For

We're a little lethargic from all the turkey and fixings yesterday. But before the tryptophan really kicks in, we thought we'd share with you some of the things that we're most thankful for this year. After reading this, you should feel comfortable enough to relax and enjoy those leftovers. We know we will.

Corporate earnings. Corporate earnings continue their advance into record territory across the globe. Productivity and cash-rich balance sheets are spurring new investment. Operating income in the US had grown by double digits 18 consecutive quarters, the longest since World War II for the S&P 500.

Strong global economic growth. World economic growth continues to surprise and outpace economists' forecasts. The International Monetary Fund (IMF) forecast for global economic growth in 2006 stood at 4.9% in April but was lifted to 5.1% in September. The IMF also raised its 2007 guidance from 4.7% to 4.9%. 2006 will cap the strongest four-year period of global expansion since the early 1970s.

Benign interest rates. Long-term interest rates around the world remain low by historical standards. Benign interest rates are important because bonds are the primary competition for equities. The lower the rate, the lower the hurdle for equities. Low rates also allow easy access to capital, stimulate investment and promote M&A activity.

Favorable equity supply trends. Most people focus on the demand side of the equity equation. But the supply side is equally important. And right now we have very favorable equity supply trends. Merger and acquisition activity is booming to record levels. M&A has totaled over $1.5 trillion year-to-date, 28% more than the year before and near an all-time high. Stock repurchases also continue at a torrid pace, and new equity issuances are restrained, together reducing the total supply of publicly traded companies.

Relative valuations. Stocks remain undervalued. Earnings yields (the inverse of the P/E, or E/P) on stocks throughout the developed world and most major emerging markets offer better returns that the yield on bonds or cash. On this basis, stocks are nearly as attractive today as they were at the bottom in 2003.