Greek debt, U.S. debt, Iran’s nuclear program, high unemployment, gas prices at $4 per gallon, and the politics of a critical election year: Have we really just completed 10 consecutive quarters of positive GDP Growth?! In other words, the economic recovery is practically two-and-a-half years old!
Yes, the pace of the recovery and the associated job growth has been slow; however, the private sector has added about three million jobs. Over this time period, the Federal Reserve has been very accommodating with its policies, influencing historically low interest rates for consumers and corporations. Seventy-one of our economy is powered by consumer spending. Pent-up demand exists in key cyclical areas: autos, housing, and general inventories. When added to healthy corporate profits and balance sheets, these areas could drive continued market performance throughout this year and beyond.
As we look at the current valuations of bonds, we are siding with Warren Buffett, who recently said that low interest rates and inflation should dissuade investors from buying bonds. Stocks, however, look attractive, especially when you consider the historical valuation metrics used to measure their relative value (such as price to book, price to forward earnings, and price to cash flow). David Kelly, the chief market strategist of JPMorgan Funds, pointed out the following statistic: In March 2000, the earnings yield of the S&P 500 was 4 percent, and the yield on Baa bonds was 8.3 percent. Currently, the S&P 500 earnings yield is 7.9 percent, and the Baa bond yield is 5.1 percent.
As the first quarter comes to a close this week, the S&P 500 performance will most likely top 10 percent for the quarter. However, it still trails the October 2007 market high of 1,565 by more than 150 points—possibly an achievable outcome for this year. What’s the bottom line? We believe there’s still room to run, and today’s levels may represent an attractive opportunity for some investors, especially if their investments are coordinated with a comprehensive financial plan.
Dean J. Catino, CFP®, CPRC, is a managing director and cofounder of Monument Wealth Management in Alexandria, VA., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer. Securities and financial planning offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. Follow Dean and Monument Wealth Management on their blog Off The Wall and on Twitter at @MonumentWealth and @DeanJCatino. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for individuals. To determine which investment is appropriate please consult your financial advisor prior to investing.