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Low Rates Driving Market Higher, but Watch Valuations—Searching for Alpha for March 2012
The stock market has been able to follow a spectacular January with an impressive February. Economists are lauding the domestic economic recovery, along with the improving jobs picture and robust earnings. But make no mistake: lower rates are driving this market higher.
The Fed’s zero rate policy, which it has said will likely last at least through 2014, has effectively muted any argument for not investing in equities. Low rates will ensure that bank deposits will earn virtually nothing, and higher quality bonds can offer only a bit more. Dividend-paying stocks have become the new fixed income alternative for many investors. This may be great news for stock market aficionados, but beware of the implications.
For starters, doesn’t the recent popularity in large-cap dividend payers sound familiar? Students of the market should recall the “Nifty Fifty” craze in the 1960s and 70s. During that period, large stocks soared in popularity and enjoyed sky-high valuations. The inflation-charged bear market that followed resulted in these stocks underperforming the broader market averages.
There is no evidence that large company stocks are getting overvalued—yet—but advisors should heed the lessons from history. Sometimes good things come in small packages.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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