Bob Lee, a Chief Equity Strategist with People's United Bank, joins us with stock market insight.
What are you telling clients about your outlook for stocks?
We've been overweighting stocks in client portfolios for the last two years. And, though the market is up nicely (10 percent on the S&P 500 this year, 16 percent last year). We still think stocks are attractive today, selling at less 14x forward earnings. Stocks continue to be cheaper relative to bonds than they have been in a long time and many stocks are offering attractive dividend yields as well.
How do stocks match up with bonds today?
The yield on a 10 year Treasury bond (1.7 percent) today is not enough to cover inflation, the dividend yield on the S&P 500 today is about 2.0 percent. But, in addition, with stocks you benefit from the long term growth in earnings and dividends-which has averaged about 7 percent per year. Of course, stocks are more volatile. We tell our client to look past near term volatility, focus on long run returns versus inflation.
Why does it seem like this has been a stealth bull market?
Burned into recent memories are two severe bear markets over the last 15 years. Up until recently, the public was not quite ready to move back in. They didn't trust the market-they heard about the flash crash, that unemployment numbers were not great, they've heard ads saying that the market was a casino, and they were told to buy gold. But stocks actually move for fundamentally sound reasons in the long run.
Stock prices move in line with earnings, and earnings have more than doubled in last three years. We expect them to rise again this year and next. Those who were too cautious, fearing the worst, have missed out on a doubling of stock prices over that time. Being "too cautious" can be dangerous too because your savings may not keep up with inflation.
What investment themes interest you today?
The recovery in housing, cost savings in health care, and the trend of cost-conscious consumers.