Despite the slow economy and the ongoing credit crunch, Stuart Schweitzer, global markets strategist at JPMorgan Private Bank, last week shifted 5 percent of cash in typical balanced accounts to U.S. equities. Here's his take why American stocks are worth buying now:
Why add U.S. stocks?
The news is bad. The economy is not likely to recover for some time. But a lot of that is well known. I don't think it's a surprise to anybody at this point. As an investor, it's not just about the news; it's about the price you pay for the news. The price is low. The likelihood is that everyone who's going to get negative has probably already gotten there. Have earnings expectations come down far enough?
I think there's still downside risk both to the economy and profit expectations. Earnings weakness has been concentrated in financial and consumer discretionary areas, so there is the risk of disappointment elsewhere. But I think we have to be careful not to take Wall Street's earnings forecasts too literally. I think real money investors have already anticipated Wall Street forecasts will prove too high and are paying a price commensurate with lower earnings. Stocks have rebounded a bit from July lows. Is it really time to turn totally bullish?
I'm not there yet. It's encouraging to me that shares have rallied a little bit off the bottom. I think the jury is still out. But we're much closer to the bottom and the downside risks have become much more balanced against the potential upside. When will stocks really rebound?
We'll feel like it's a recession well into 2009, but markets will rebound long before the recession is over. Even consumer stocks will rebound while job losses are still occurring. Why does inflation matter so much for stock investors now?
In the end, inflation is basically the answer to every question. The path to better days ahead has to be paved with lower inflation for any improvement to be sustainable. Although commodity costs affect us all, commodities are a small part of the overall business cost structure. The biggest piece is labor costs. The U.S. recession has begun already to bring wage pressures down in America, whereas wage pressures are building elsewhere, particularly in Europe and the emerging markets. That positions us to get out of this mess much sooner than the rest of the world. We were first in, but we're likely to be first out. So U.S. stocks are going to do better?
European shares will underperform, and the dollar has the potential to rally, let's say 10 percent, over the next year. The potential for outperformance of the U.S. relative to Europe is considerable. I also favor the U.S. relative to emerging market economies. The extraordinary strength of emerging market growth is facing challenges. By the time the U.S., Europe, and Japan are all in recession, it makes it likely emerging economies will cool down. It's an unfortunately necessary condition. What parts of the U.S. market should you invest in now?
We added to large cap core. That reflects a couple of principles: (1) Small caps seem expensive to us relative to large caps. I prefer large caps, and growth [stocks] overall. The reason we added to core rather than growth is a lot of value has gotten beaten up. We want growth [names in] healthcare, staples, and technology. But we don't want to ignore the financials. I wouldn't be making a major bet as of yet, but [banks are] well cheaper than they've been and can still have a place in a balance portfolio—though I wouldn't make that place too large. Specifically, what makes those sectors attractive?
I would point to technology. It's the enabler of cost cutting in the world today. Cost cutting and efficiency improvements will be the key to future success. I believe technology will be a beneficiary. But again, the key to staying with a point of view is not to allow that point of view to get overblown. I'm not saying tech is going straight up. I hope it will, but I'm reasonably confident that on a one-year basis, tech will be one of the stronger performing sectors.