GOLDEN VALLEY, Minn. - The S&P 500 has rallied significantly in the past few weeks, producing the longest winning streak
But investors are still hesitant, despite the rewarding recovery witnessed in the markets.
Dan Ament, Financial Advisor with Morgan Stanley in Wayzata joins us in-studio to share his thoughts
Investment Outlook - Bulls and Bears:
Bulls - Factors arguing in favor of equities include: stimulative monetary policy, six central banks' coordinated liquidity provision to funding markets, the Long-Term Refinancing Operation and the Outright Monetary Transactions Program by the European Central Bank, and Quantitative Easing IV. The consensus of analysts' forecasts for S&P 500 calendar-year earnings per share growth is 5.2% for 2012 and 9.8% for 2013, according to Thomson Reuters. Improving economic data: recent steady job growth, new unemployment claims, household net wealth levels, auto sales, consumer credit, home prices, new and existing home sales, housing starts, building permits, retail sales and Chinese GDP growth reflect strength and/or improvement in these sectors. Valuations: twelve-month forward price/earnings ratios are not excessive and the earnings yield (the inverse of the P/E ratio) is at elevated levels relative to Baa corporate bond yields. High US corporate cash levels enable increased dividend payouts, stock buybacks, and mergers and acquisitions activity. The economic and financial outlook for Europe, China and Japan appears to be improving.
Bears - Crucial issues remain unresolved concerning the spending sequester and a possible US Treasury debt downgrade. Germany, France, several other Euro Zone countries, the UK, and the US have been implementing fiscal austerity measures; the payroll tax increase should reduce 2013 US GDP growth by 0.6%. Higher taxes: maximum federal tax rates on dividend income have risen to 23.8% from 15%; and on capital gains, to 23.8% from 15%. As of the end of November, European unemployment was 11.8%; for December, US unemployment was 7.8%; the broader measure of US unemployment, U-6, was at 14.4%. Medium-term GDP growth may be held back by: (i) bank, government and household deleveraging; (ii) state, local, and federal government fiscal austerity measures; (iii) recessionary trends in Europe; (iv) weak consider confidence and personal income growth; and (v) lackluster global trade, business capital spending, and industrial production. Global investors and officials have continuing concerns about the quality, maturity structure, and magnitude of several countries' sovereign debt burdens and their ability to service such obligations. US stocks are not undervalued using long-term metrics; the Shiller P/E-that is, price divided by 10-year average real earnings-for the S&P 500 is 22.7, which is 38% above its long-term average of 16.4.
Survey says? DALBAR's Quantitative Analysis of Investor Behaviour compares the investors' returns against market returns. The most recent DALBAR study found that in the 20 calendar years ending in December 2011, the Standard & Poor's 500 Index had a 7.8% compound rate of return. In the same period, the average investor in US equity mutual funds earned just 3.5%. Even in the five-year period ending December 2011, mutual fund investors went in and out at the wrong times, resulting in inflows when the market declined and outflows when the market rose.
Bottom line for investors? Combat one of your investing enemies ... yourself. Develop an investment allocation fitting to your time horizon, risk tolerance and investment objectives; one that you are able and willing to stick with through the inevitable market corrections, economic recessions and other market disrupting events.
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