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Prices of homes in most major cities rose in April, the latest month for which data are available, and the trend may continue. People have been signing contracts to buy existing homes at the fastest pace in two years, encouraged by low mortgage rates. The average rate on a 30-year fixed mortgage has fallen to 3.66 percent, the lowest on record. James Paulsen, chief investment strategist at Wells Capital Management, says falling gas prices and mortgage rates have kick-started economic growth in the second halves of the previous two years, and he thinks they will this time, too. He thinks the S&P 500 could end 2012 at 1,500, up 19 percent for the year. It closed Friday at 1,362. If the worst of Europe's debt crisis is indeed over, Paulsen's target doesn't seem so bullish. But stocks have rallied on hopes of a permanent fix before, only to be dashed on news of rising Italian borrowing costs, scary Greek elections and teetering Spanish banks. And you can't rule out the occasional unhappy surprise at home, either. On May 10, for instance, JPMorgan Chase announced that it had lost at least $2 billion on a complex derivatives bet. A little more than a week later, Facebook's debut on the public markets was marred by technical glitches, a delayed open and a sinking stock price. "You can't build wealth without volatility," says Doug Cote, chief market strategist for ING Investment Management, who says he's been buying stocks. He calls dips in the prices lately "an extraordinary opportunity." What's got the bulls excited is that stocks look cheap relative to their earnings, at least by some calculations. The gauge used is called a price-earnings ratio, which you get by dividing a company's stock price by what Wall Street analysts expect the company to earn per share over the next 12 months. Do that for all 500 companies in the S&P index, and you get 12, according to FactSet, a research firm. That is lower than the 10-year average of 14.6, meaning stocks may be cheap and you should buy. Or to paraphrase Warren Buffett, you should get greedy when investors are fearful. The problem is, P/E ratios are just a rough measure of the stock value, and the math can be misleading. Some analysts like to compare the current S&P 500 P/E ratio with the average going back further, say 35 years. Over that period, stocks have traded at 12.9 times expected earnings, according to David Kostin, a strategist at Goldman Sachs, suggesting stocks now are not so cheap after all. Plus, Wall Street estimates for earnings could be too high. For the October-December period, for instance, analysts think earnings will increase by more than 14.4 percent. The average quarterly increase the past 25 years is 8 percent. And the analysts have been cutting estimates recently. Kostin thinks they'll have to cut a lot more. He says investors expecting an earnings rebound this year will be disappointed. He thinks the S&P 500 might fall 8 percent from here.
[Associated
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