In a wide ranging interview with The Motley Fool web site, Charles Schwab Chief Investment Strategist Liz Ann Sonders says she thinks a correction will hit the stock market in the near term. She’s optimistic on the economy, however, and says current equity valuations aren’t bad.
“I’m actually probably a little more optimistic than the consensus about the economy, but I think the market has more things with which it’s going to have to contend this year,” Sonders said. “We’re seeing the market faced with not only pre-existing problems, but also some new problems. I think we’ll see more corrective phases like the one we seem to have gotten a signal of last week.”
But Sonders says that while they’re not undervalued like they were last year at this time, stocks aren’t overvalued. “At best, we’re reasonably valued,” she said. “So now you need the denominator — the E [in P/E] — to do the lifting. I think it probably will — again, not without bouts of corrective phases, but I think earnings will be a pleasant surprise this year.”
In his year-end letter, Jeremy Grantham says that equities are once again significantly overpriced, and that investors haven’t learned the lessons of recent market crashes. But, he adds, stocks will likely head higher in the short term.
“All investors should brace for the chance that speculation will continue for longer than would have seemed remotely possible six months ago,” writes Grantham. ” I thought last April that themarket (S&P 500) would scoot up to 1000 to 1100 on a ypical relief rally. Now it seems likely to go through 1200 and possibly higher. The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced, although the high quality component is still relatively cheap.”
In terms of foreign markets, developed markets look like they are a bit overpriced, Grantham says, and emerging markets are more overpriced. In addition, fixed income investments seem “badly overpriced, especially cash.”
But the poor returns available on cash and fixed income investments doesn’t mean that investors will flock to stocks over the longer term, Grantham says.
Hedge fund guru George Soros made a couple big statements Thursday, saying that China’s stock market is “overheating”, and that gold is becoming the “ultimate bubble”.
“Right now, the Chinese market is overheating and they have to slow it down,” Soros said on Bloomberg Television. “It remains to be seen how successful they are.”
As for gold, Soros says that low interest rates around the globe are creating an environment in which new bubbles have formed, according to the Telegraph of London. “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold,” he said.
For more of Soros’ take on China and other issues, you can view his Bloomberg Television interview below.
David Herro, who was recently named one of Morningstar’s fund managers of the decade, says stocks are still cheap — especially compared to other asset classes. Herro says that during most downturns, his portfolios’ prices fall to about 50% of their underlying values. In the recent downturn, they fell to about 35%, he says, and after the recent rally, they’re trading in the mid-50% range — still near the levels typically seen in normal downturns.
Also make sure to check out Herro’s explanation of how he goes about finding value in stocks.
For stocks, 2009 was one of the most eventful years ever. From the widespread fears of financial Armageddon that pounded the market at the beginning of the year, to the signs of “green shoots” of hope, to one of the strongest and swiftest market rallies in history, a myriad of factors caused stock prices — and investors’ emotions — to swing wildly.
In the end, the market ended up well in the black, and our Validea.com guru-based models did even better. While the S&P 500 rose 23.5%, John Reese’s 12 individual guru-based 10-stock portfolios gained an average of 34% for the year, and the Hot List portfolio — which uses a blend of all of the individual approaches — jumped 47%.
The biggest winner of ’09: The Joel Greenblatt-based 10-stock portfolio, which jumped 63.1%. Also near the top of the list were the Warren Buffett-inspired 10-stock portfolio, which gained more than 50%, and the Peter Lynch 10-stock portfolio, which gained more than 45%. And the Top 5 Gurus portfolio, which, like the Hot List, uses a multi-model approach, gained more than 55%. All in all, 11 of the 14 ten-stock portfolios beat the market; 12 of the 14 twenty-stock portfolios did so as well.
To read more about how Validea.com’s guru-inspired portfolios performed in ’09 (and over the long term), click here for a free special report.
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today, including big names like Apple and Johnson & Johnson.
Hedge fund guru Barton Biggs says he remains bullish on stocks, despite the factors that have spooked some investors in recent days. Biggs tells Bloomberg that the U.S. economy is in a “strong recovery”, and that he thinks the U.S. will grow in the 5% to 5.5% range in the next couple quarters. He also says valuations on stocks remain attractive. Among the areas he’s high on: large, high-quality technology stocks, large, multi-national growth plays, and high-quality drug firms.
It’s no secret that the 2000s was a bad decade for the major U.S. stock market indices. The S&P 500 lost an average of 1% per year, some 3.6 percentage points worse than inflation, making it the worst decade for real returns on record.
But in a recent paper, Research Affiliates’ Rob Arnott notes that the broader market’s struggles didn’t mean that the 2000s were a lost decade for investors. According to Arnott, investors who truly used proper diversification and bought stocks using fundamental-weighted index funds actually could’ve posted returns close to 9% per annum.
Arnott says a big mistake that investors make is being wedded to a 60%/40% stocks/bonds portfolio. “Risk premiums are time varying and greatly depend on starting valuations,” he writes in a piece published by IndexUniverse.com. “Stocks — like any other asset class — will disappoint us if we buy them when they’re expensive and will delight us if we buy them when they’re cheap. … If we build our portfolios to hold more of an asset when it is expensive and less when it is cheap, we’re likely to see a return drag.”
And, entering the 2000s, many parts of the stock market were very overpriced and primed for poor returns, Arnott says. But other areas — and other assets — were not, and many fared quite well. For example, emerging market bonds, Real Estate Investment Trusts, and emerging markets stocks all produced annual returns of 10% or better for the decade, Arnott says.
In the latest episode of Consuelo Mack’s WealthTrack, BlackRock Global Chief Investment Officer of Equities Bob Doll says government stimulus is still providing a wind at the market’s back, and that investors shouldn’t forget that.
Doll says he’s a stock picker who also looks at macro factors, and continued stimulus impact is one of the macro factors behind his current bullishness. “That’s a wind at our back,” he said of the stimulus plans put in place in the U.S. and abroad. “This is a powerful tailwind. … When stimulus is powerful, financial markets tend to do well.”
Doll acknowledges that the winding down of the stimulus could cause some problems. But he thinks that the government support won’t be removed until self-sustaining mechanisms — exports, business investment, etc. — are providing enough support to replace the stimulus’ impact.
Doll also talks about how the speed of information has impacted the investing world over the past decade or two, how investors should approach risk, and how the U.S.’s status as the world’s greatest debtor nation impacts his investment approach.
In an interesting new study, MSCI Barra takes a look at what drives stock returns over the long haul — and the results might surprise you.
In the study (click here for an HTML version; click here for a PDF version), Barra traces stock market returns to a handful of sources: inflation, dividend income, real book value growth, and price-to-book growth. Their findings, which covered the U.S., Europe, Japan, Australia, and the U.K.: In most of those areas, including the U.S., inflation has been the greatest source of equity returns over the past 35 years. The second-greatest source has been dividend income. (Japan tended to be an exception in several ways, according to the study.)
For example, using the MSCI World Index as a basis, stocks returned 11.0% from the start of 1975 through September 2009. The biggest source of those returns was inflation, which accounted for 4.2%. Dividend income accounted for 2.9%, while real book value growth came in at 2.0%.