Scientists use the term "escape velocity" to describe the speed an object must have to escape the gravitational pull and not fall back down to the earth. The term comes to mind in observing the U.S. and world economy as it attempts to escape the pull of deflationary forces and avoid falling back down into a double dip recession.
The deflationary forces include sovereign debt problems of Greece and other southern European countries, China's policy efforts to slow real estate speculation and deficit cutting challenges of all developed countries. Today's unemployment report for the U.S. had net job losses (125,000) for the first time this year and adds to concerns over the ability to continue economic growth in the second half of 2010.
No one can say when we will reach escape velocity, but we all know at some point we will experience sustained economic growth. In the meantime the market worries are resulting in some increasingly attractive valuations for the S&P 500. Price to sales is 1 compared to a 10-year average of 1.4. Price to earnings is 11.5x (on forward earnings) as compared to an average of 16.1x for the past ten years. We make no prediction as to the market but would observe that the valuation case for stocks is definitely strengthening.
