NEW YORK (FORTUNE Magazine) -
The once-dark mood on Wall Street has brightened considerably. And, no, we're not just talking about the investment bankers dreaming up ways to spend their seven-figure bonuses.
With oil prices falling, corporate earnings still growing, and consumer confidence on the mend, the stock market has awakened from its 10-month slumber.
And the investment world's best and brightest say that's just the beginning. In a recent letter to investors, Legg Mason fund manager Bill Miller ticked off the positives:
"The economy is strong, balance sheets are as liquid as they have ever been, profit margins and return on equity are hovering near all-time highs, earnings are growing double-digit, companies are buying back stock in record amounts, mergers and acquisitions are happening at nice premiums to prevailing prices."
To Miller, the conclusion is obvious: "I think the market is going up."
Even the hurricane season from hell doesn't seem to have knocked the economy off stride. Gross domestic product grew at a consensus-thumping 4.3 percent clip in the third quarter.
Consumer spending rose 4.2 percent, while business spending on equipment and software rose at a brisk 10.8 percent pace.
Corporate earnings, meanwhile, are increasing 11 percent annually, which in turn has reduced the price/earnings ratio of the S&P to its lowest levels since 1996. Says Yale University finance professor Roger Ibbotson: "The main reason to be optimistic is that P/E levels have dropped."
Yet there are plenty of reasons to be pessimistic as well.
The economic landscape includes an energy shock, a cooling housing market, rising inflation, and Federal Reserve rate hikes. All of these are classic warning signs or symptoms of an economic slowdown.
Rising interest rates, for example, are a big drag on consumer spending. Higher rates mean heftier credit card bills and far fewer opportunities for cash-out mortgage refinancings.
Just as ominous as the overall rise in interest rates is the relationship between long- and short-term bond yields. We're now on the cusp of something known as an inverted yield curve -- a phenomenon that occurs when short-term rates (now 4.3 percent on one-year Treasury bills) exceed long-term ones (4.5 percent for 10-year Treasuries).
Inverted yield curves predict recessions with frightening accuracy. According to a New York Federal Reserve study, every time the U.S. has had a period of inverted yield curves, recession followed within a year.
The danger signals are so unmistakable that J.P. Morgan Chase market strategist Abhijit Chakrabortti believes Wall Street's bulls are in denial. "I'm thinking of calling my year-end report 'Eyes Wide Shut,' " he says.
Confused? Given the mixed signals, that's understandable. It's also why the stocks we're recommending for 2006 don't depend on a rousing economy or a rising-tide stock market. After reviewing the latest research and interviewing dozens of analysts and money managers, we trained our sights on 10 moderate-P/E stocks positioned to benefit from secular -- not cyclical -- trends.
If tech stocks take off, our picks may not keep pace. But in a rocky market, they should provide a margin of safety. See the 10 in the table below. Click on company names for more of FORTUNE's analysis.
To read the complete story, go to Fortune.com.
|10 companies with staying power
These stocks are the kind of strong, steady performers that can hold their own in all kinds of weather. Click on company name for FORTUNE analysis.
|Altria Group (MO)
||Easing litigation pressure and rich yield make it a buy.
|Archer Daniels Midland (ADM)
||Ethanol has turned agri-giant into an 'energy growth story.'
|Berkshire Hathaway (BRKB)
||PUHCA repeal means it's easier for Buffett to invest in energy.
||Financial behemoth selling at an attractive price.
|Eli Lilly (LLY)
||Drug giant has best growth prospects in the industry.
||CEO Mark Hurd is cutting billions in costs.
|Norfolk Southern (NSC)
||Beating CSX in service and profiting from surging coal demand.
|Washington Mutual (WM)
||The nation's biggest thrift yields more than a Treasury bond.
|Prices as of: Apr 13 10:00