Global Market Strategist: 7 Reasons to Be Optimistic About Investing in EquitiesSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on November 20th, 2020
By Devone McLeod, CFP®, November 20, 2020
Despite the pandemic, political uncertainty, and government-mandated shutdowns, the S&P 500 index has produced a 10% return year-to-date. The NASDAQ composite is up 30%. Yet the Main Street economy struggles.
It’s logical to wonder: should stock market investors remain optimistic heading into 2021, or are equities currently overvalued?
During last Thursday’s virtual event titled How the Election Results Impact Your Wealth, Global Market Strategist Brian Levitt – a regular on CNBC, Bloomberg, and The Wall Street Journal – reinforced our belief that owning equities is the best way for most people to grow and protect wealth under the current economic conditions. Levitt explained:
“It's an economy that's coming out of recession. The Fed funds rates are at zero. Stocks are cheap [compared with] bonds. We have a divided government. When was the last time we had all four of those things? 2011, 2012, 2013, 2014, 2015 – Right? And how did stocks do from 2011 to 2015? They returned 13.6% per year.”
If you feel anxiety about owning equities heading into 2021, here are seven reasons to be more optimistic:
1) The power of science and medicine to defeat COVID-19.
Healthcare providers have dramatically reduced COVID-19 mortality rates since the start of the pandemic. Now, Pfizer and BioNTech claim their vaccines are 95% effective—and safe. If approved by the FDA, these vaccines will likely play a major role in restoring normalcy to economic activity.
Prior to the pandemic, nearly all indicators pointed to a strong economy. Defeating the novel coronavirus can help us get back to low unemployment, high income growth, and corporate earnings that drive shareholder value.
2) We are coming out of a recession.
The stock market is a forward-looking economic indicator. Money flows into equities in anticipation of improving economic conditions and the corresponding increase in corporate earnings. Historically, long-term investors have profited from owning equities during recessions—before the rebound in earnings.
Over the next several months, unexpected events and setbacks in the fight against COVID-19 will probably create volatility. Recoveries almost never occur in a perfect straight line.
However, Levitt expects the overall trajectory of the stock market to be favorable:
“The markets are going to trade on whether things are getting better or worse, and so over the next couple of years there should be tailwinds [in favor of the stock market].”
3) The Fed funds rate is near zero; and 4) stocks are cheap relative to bonds.
On Thursday evening, Levitt reiterated an industry mantra: Don’t fight the Fed.
“The Federal Reserve is telling us that they're keeping interest rates at zero until at least 2023, maybe beyond, thereby incentivizing investors to do something else with their money.”
In the video clip below, he compares price-to-earnings ratios with treasury yields, concluding that equities are more attractively priced than bonds, which is atypical.
5) A divided government may be good for the stock market.
Democrats need to win both Senate runoff elections in Georgia to control Congress. Otherwise, a Republican-controlled Senate can block major legislation pushed by House Democrats and a Biden administration. Levitt believes that a divided government will probably agree on a modest one-time economic stimulus package—but no major legislation beyond that.
Government inaction may not boost the economy. However, a more natural recovery, with less government involvement, may end up lasting longer, with less inflation, and no pressure on the Federal Reserve to increase interest rates.
The stock market has performed well during previous economic recoveries when power has been split between the two parties, as Levitt points out below.
6) Americans have $4.3 trillion sitting on the sidelines.
Current Federal Reserve policies practically ensure that savings accounts will earn negative real returns. The 2% target inflation rate erodes wealth faster than money can grow inside savings accounts and money market funds.
As Levitt and Bob Reby discuss below, a significant portion of the $4.3 trillion currently sitting on the sidelines may eventually flow into the stock market, increasing value for current shareholders.
7) Historical performance favors the stock market.
During times of high market volatility, it’s important to maintain perspective. Equities have performed well over the long-run despite financial crises, inflation, high taxes, fuel shortages, and more. Levitt summed it up well:
“The S&P 500 came out in 1957. It's hit an all-time high once every 16 days. So long as the economy is growing, you would expect indices to hit all-time highs. [Stock prices] are a reflection of improving economic and financial market conditions, and over the last 63 years, things have largely gotten better.”
WATCH: How the Election Results Impact Your Wealth
To watch the full video replay (47 minutes) of How the Election Results Impact Your Wealth, go to https://events.rebyadvisors.com/bob-reby-brian-levitt-talk/.
Please do not hesitate to contact us if you have any questions or need financial advice.
The information is provided for educational purposes. Each individual's situation is unique. Speak with a Financial Professional before taking action.