Economic crosscurrents have finally caught up to the market. Just this week alone, Italy's election woes, the sequestration and a paltry fourth quarter GDP report has made believing in the equity rally a little tougher.
A quick glance at the fundamentals show that for every reason to own stocks there is an argument to sell them:
- Earnings have risen, but coming public austerity in the U.S. could put an end to further expansion
- Companies are in good fiscal shape, but a slowdown in consumer spending is problematic
- Housing starts are impressive, but employment growth is still paltry
So what's an investor to do, and what's an advisor tell clients? First off, it's important to have a long-term view. Mine is bullish, and based mainly on valuation. The forward P/E for the S&P 500 is around 13, which is below the previous two peaks in March 2000 (P/E was 27) and October 2007 (P/E was 15). And since earnings are higher now than they were then, that should give the market some wriggle room. We might have some short-term weakness, but it's important not to let one's market exposure (beta) dip during portfolio rebalances or redeployments.
Further, stocks have a competitive advantage versus other asset classes. They are not widely owned, yet the supply is shrinking due to M&/A activity (which, in turn, is being fed by lower rates). Dividend yields are comparable to short-term bonds, but the upside for equities is much greater.
