We asked two local financial advisers where the regular investor fits in this market experiencing record highs, and where they can look to find investment bargains today.
Senior vice president and San Diego market leader
The Private Client Reserve, U.S. Bank
The U.S. equity markets have recently hit all-time highs despite mixed economic numbers and rising geopolitical risks. Factors driving stock prices higher include an improving employment picture, low inflation, a recovering housing market and rising consumer sentiment.
Corporate balance sheets are healthy with record levels of cash and the environment for mergers and acquisitions is strengthening. Our outlook on equities remains positive, and the focus this year will move from Fed-driven liquidity to earnings. Equity prices, while elevated, remain fairly valued on a historical basis with the S&P 500 trading at roughly 17 times trailing 12-month earnings. Conditions remain favorable for equities to trend higher in 2014, albeit at a more moderate pace than last year.
The current climate of steady growth and low inflation is positive for cyclical stocks. Investor appetite for yield remains high and favors companies with strong cash flow, increasing earnings and rising dividends. Higher capital spending and a manufacturing renaissance bode well for sectors levered to an improving economic outlook. Sectors we favor include technology, industrials and energy. The energy sector is experiencing a rebirth as the United States harnesses new technology to increases oil and natural gas production.
At The Private Client Reserve of U.S. Bank, we advocate that all investors maintain a well-diversified portfolio and avoid trying to time markets. We invest with a fiduciary mindset of preserving capital while looking opportunistically around the world for growth. Our portfolio construction includes four major asset classes: equities, fixed income, commodities and real estate. We focus on helping clients achieve their financial goals and weather market volatility.
Reed F. Bermingham
Manning Wealth Management Inc.
We’ve certainly come a long way in the past few years.
If you’ve been investing in stocks consistently since the 2008-09 lows, you’ve likely participated in the bull market that has led to recent highs. If you were on the sidelines, you need to assess why that was the case. Often times, people are hesitant to invest at market highs because they feel that a turnaround is right around the corner. This represents an attempt to time the market and should be avoided.
Record highs are not necessarily something to be scared of. Actually, record highs are quite commonplace during a bull market and do not automatically indicate that things are about to turn negative. The Dow Jones has not gone from the 900s in the late 1970s to over 16,000 today without consistently establishing new record highs, despite some pullbacks along the way. This is the type of long-term perspective that investors need to outweigh short-term concerns about what the market will do next.
A regular investor has the ultimate luxury of a time horizon, something large institutions do not possess. Regular investors aren’t building portfolios for a month from now or next quarter, they’re building long-term portfolios to keep their savings growing at a higher rate than inflation, in order to protect purchasing power in the future. We know that over time, stocks are one of the only assets that have accomplished this.
With this in mind, I don’t think long-term investors should be concerned about current valuations. Just because a stock is trading at the highest price it ever has does not necessarily mean it isn’t worth buying. In fact, it wouldn’t have gotten where it is without someone willing to pay a higher price than the person before them. Current data suggests that in historical terms, major stock averages are “fairly valued,” meaning the price you pay for a stock in terms of its earnings, book value, cash flow, sales and other metrics is currently in line with long term historical averages.
What’s most important is that the investments you chose are able to fulfill what you are trying to accomplish, when you’re trying to accomplish it. For regular investors, developing a long-term strategy with conviction will always trump trying to move in and out of markets in search of the next great performer. Too much emphasis on finding a bargain in a fair market could leave you missing the boat to the next all-time high.
-Compiled by James Palen