Friday, March 21, 2014

Are Stocks Still Attractive?

I must admit to some recent wobbles in the supportive view of equities I've held since 2012.  War in Europe and potential war in Asia.  Indications of incipient wage pressures.  And then Yellon.

The processessing continues though, in the back of one's brain, and this morning the fog rolled out, so to speak.

The (coming) end of ZIRP (Q2 '15 per Janet?) indeed means the days where it was fairly simple to come to a positive view on stocks is over.  But (duh), it doesn't mean stocks will collapse.  In fact, many of the core reasons why stocks have been a good bet are still there, in particular goldilocks economic growth and low real interest rates.

So my view is that stocks will become more sensitive to absolute and relative valuations and hence earnings per share growth.  The fact that virtually the entire world outside the US is unattractive and/or faces severe secular challenges - this is going to matter more for US stocks in 2014 and beyond.  But... at 18x trailing reported earnings, with likely continued mid-single or better eps growth, no recession, very moderate inflation and low short and long real rates... stocks will be more volatile but still offer 5-10% annual returns going forward.

PS. I continue to believe that GMO is smoking dope when they express the belief that US profit margins will, at any moment, collapse and "revert to mean" as though the post-war period through 1990 is somehow a relevant benchmark for what a public corporation is and does in 2014.  Ridiculous.

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