Full quarter, half glass
Joel Dresang: Dave, the broad stock market did pretty well in 2013. It went up about 30%. The first quarter of 2014 was pretty lackluster, though. How are you dealing with that with clients?
Dave Sandstrom: I kind of view it as a glass-half-empty-glass-half-full kind of a conversation with clients. Are we disappointed? Maybe a little bit. You know, you come off of those big years and you expect to see that continued growth, and we did have a pretty good sell-off.
But I think when you really look at some of the things that we withstood; there were some pretty substantial events that we took on.
Joel: What sorts of events are you talking about?
Dave: Well, we had the beginning of the tapering process. So back in December, we started reducing our bond purchases by $10 billion a month. And a lot of experts thought that that was going to really deflate markets. As tapering continues, we don’t see depression in those markets.
Number two, China came out with some fairly disappointing growth news year. That was one of the things that did knock us back a little bit to start the year. In February alone, their exports, down 18%. Those are substantially difficult numbers for them right now. And, as you know, emerging markets around the world, 30% of their economies directly related to China’s growth. So some concerns there.
And if you really look at it from that standpoint, you put those things together. You get a little unrest. We’ve got Russia moving into Ukraine, amassing troops on the border there. And so far, not a lot of reaction from the markets.
So, if you look at all those things together, the fact that we’re breaking even maybe isn’t such a bad thing.
Joel: So, that’s kind of a glass-half-full view of it.
Dave: Absolutely. And we’re guardedly optimistic.
Joel: What sorts of concerns do you have going forward?
Dave: I think we have to continue to monitor what’s going on with the tapering. Right now, the Fed has laid it out for us that that’s going to continue. And at the current pace, you’d see the tapering process wind down by October. So if we continue to see economic growth along those lines, see the numbers that they’re kind of watching continue, and that tapering process will wind down this year. So it’ll be interesting to see if markets continue to be resilient.
Joel: And China?
Dave: Will China get things under control? Will they be able to reverse this downward pressure on their growth? Most of the experts think so. China has the ability to control their own currency, so they can do some things that we can’t do here. So we’re looking at potentially their ability to stimulate consumer spending in their economy, which is really their ultimate goal.
Joel: Dave, for stocks, they say in the long run what really matters are earnings and interest rates.
Dave: Exactly, Joel. And if you look at right now, Bloomberg’s estimates for the balance of this year, they’re looking for earnings growth somewhere in the 7% to 8% range. And longer term, in 2015 and 2016 – 11% growth in those two years. So the earnings growth forecasts are there.
And the Fed just reconfirmed their stance earlier this week that short-term interest rates are going to be pegged near zero now for some time to come. And so we have that environment in place for that type of stock support.
Joel: And stock valuations are about historical average?
Dave: Absolutely. Current and forward P/Es are right at historical norms, maybe a little bit higher. But, depending on the sector you’re looking at, there are still some bargains to be had out there. Now, where those prices aren’t screaming let’s buy, they’re also not indicating that it’s time to head for the door.
So remember, markets don’t end at fair market value. They end at excess. And so, this bull run still has some legs.
Dave Sandstrom is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted April 3, 2014)
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