Don't Give Up on U.S. Stocks Just Yet

There's no denying that bearish investors have made their case in recent weeks. They are legitimately afraid that the economies of the United States and Europe will fade so much in the next few months that they will sink back into recessions punctuated by credit blowups and a resumption of a bear market for U.S. stocks.

Still, the simple fact that there are a few economic boogey-men lurking behind each suspect piece of data doesn't mean that investors should run screaming away from stocks.

In fact, if you take the time to listen to the opposite point of view before you make up your mind about the direction the economy is headed, you might be pleasantly surprised.

Consider, for instance, that Morgan Stanley (NYSE: MS) analyst Richard Berner – who has been around the block a few times – says his models suggest that the pace of economic growth will actually quicken in coming months.

In his words: "Incoming data portray a robust economy, an acceleration from a 3% pace of growth in Q1 to a 4% annual clip in Q2 even as consumer spending decelerates…And we continue to expect 3.5% overall growth in the second half of this year."

Berner, who is the co-head of global economics and chief U.S. economist at Morgan Stanley, cites three factors for this bullish outlook:

• First, is strong global demand, which can be seen in the record level of export orders in purchasing manager surveys as well as economic data from overseas. The ISM export orders' diffusion index, which weighs the percentage of manufacturing executives forecasting strength versus the ones forecasting weakness, is at its best level since 1988. In Brazil, consumption is up 9.3% year-over-year. In Canada, wages up are 2.4% from a year ago. Korean raw material imports rose 91% in May.

• Second is rising U.S. income growth. Berner estimates that hours worked (which closely tracks income growth) rose at a 3.75% annual rate in Q2 – the best result since early 2006. Overall, he is looking for average monthly payroll gains of 200,000 per month through the rest of the year.

• The third, and final, factor is the lingering impact of the stimulus package, including hotly debated infrastructure projects. The March-April 2010 data for state and local construction outlays show that federal spending has finally overwhelmed local construction cutbacks. Berner's team estimates that construction spending is increasing at an 18% annual rate in the current quarter, following two quarters in which spending dropped at a 13% annual rate.

So while there's no doubt the global economy continues to face challenges from the sovereign debt issues and the lingering concerns over the housing market and consumer credit, there is measurable strength.

Plus, don't forget that the whole European mess will provide two big tailwinds to American consumers: Cheaper gasoline prices – thanks to a stronger dollar – and lower mortgages rates – thanks to a rise in demand of Treasury bonds.

If that's not enough to make you feel better, here are a few final pluses:

Household net worth rose by 2.1% in the first three months of this year to $54.6 trillion. That marked the fourth consecutive quarter that Americans' wealth grew. It's worth noting that during the recession, which began in December 2007, household net worth plunged as low as $48.3 trillion in the first quarter of 2009.

Meanwhile, gasoline prices are expected to drop 4.5% this month from last month, keeping inflation at bay.

The bottom line: Overall economic and corporate growth may be set to slow, but not to levels that are disastrous, or even likely to imperil the stock market – at least not yet.

So, continue to fade the pessimism while it persists, but keep an eye out for an overabundance of optimism if we get to the top of the range at the 1,150 level of the Standard & Poor's 500 Index, or if bears get the upper hand and manage to push the benchmark index under 1,040.

[Editor's Note: As this market analysis demonstrates, Money Morning Contributing Writer Jon D. Markman has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find.

Subscribe to Strategic Advantage and hire Markman to be your guide. For more information, please click here.]

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