Phil Mahoney, a certified financial planner at Legacy Wealth Planning in Reno, is back with a review of U.S. stocks in our current and recent climate. Thanks for another great guest post, Phil.
“Fish see the bait, but not the hook; men see the profit, but not the peril.” (Chinese Proverb)
The key to successful investing is not seeing the future with some kind of mythical vision — it is seeing the present with clarity. I think this is as true today as ever, in a world recovering from financial crisis, rife with political discontent, extreme monetary easing and deep-seated investor prejudice.
It has been an extraordinary five years for U.S. stocks. Since the winter of 2008-2009, through the depths of recession and financial crisis, the S&P 500 has soared by about 179% according to J.P Morgan, in one of the biggest bull markets in modern history. It is a cliché to say that “the easy money has been made” but the truth is that it’s never easy at the time. In early 2009, using common objective measures, stocks were very cheap, but investors were understandably worried about the stability of the global financial system and the depths of an enveloping recession. Today, even as the headwinds and tail risks have abated, stocks have now risen so much that many investors wonder if it is still prudent to be over weighted in U.S. stocks.
I believe the answer to that question is yes, for a number of reasons:
• First, barring some shock, an expanding U.S. economy should support further gains in corporate earnings.
• Second, while both inflation and interest rates look set to rise, they should remain low enough over the next few years to support rather than undermine equity valuations.
• Third, while many valuation models no longer show stocks to be cheap on average, they don’t show stocks to be particularly expensive either.
• Finally, as of right now, the US economy does not appear threatened by either the geopolitical shocks or economic imbalances that have heralded the end of previous bull markets.
Things can and do change, of course, but for now, despite strong gains in stocks to this point, a mild overweight to U.S. equities still seems in order in the context of an appropriately balanced portfolio.
Meanwhile, geopolitics continues to dominate the headlines with continued unrest in the Ukraine, and Al-Qaeda-inspired militants now in Samarra, just 80 miles from Baghdad. This has put upward pressure on oil and gold prices, while perhaps putting a damper on the equities markets. Remember 2011, when investors were freaking out about soaring (7%) Italian and Spanish bond yields? Last week, believe it or not, 10-year Spanish bond yields fell below the 10-year U.S. Treasury bond yield!
This should remind us about “Headline Risk,” which is the possibility that a news story will adversely or positively affect a securities price. While the effect is frequently short in duration, it can throw us off of carefully well-laid plans and adversely affect our well-being, both psychologically and in our returns. So be careful when making decisions based upon the news you see on TV.