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Time for Market to Show Its True Mettle—Searching for Alpha for March 2013
Economic crosscurrents have finally caught up to the market. Just this week alone, Italy’s election woes, the sequestration and a paltry fourth quarter GDP report has made believing in the equity rally a little tougher.
A quick glance at the fundamentals show that for every reason to own stocks there is an argument to sell them:
- Earnings have risen, but coming public austerity in the U.S. could put an end to further expansion
- Companies are in good fiscal shape, but a slowdown in consumer spending is problematic
- Housing starts are impressive, but employment growth is still paltry
So what’s an investor to do, and what's an advisor tell clients? First off, it’s important to have a long-term view. Mine is bullish, and based mainly on valuation. The forward P/E for the S&P 500 is around 13, which is below the previous two peaks in March 2000 (P/E was 27) and October 2007 (P/E was 15). And since earnings are higher now than they were then, that should give the market some wriggle room. We might have some short-term weakness, but it’s important not to let one’s market exposure (beta) dip during portfolio rebalances or redeployments.
Further, stocks have a competitive advantage versus other asset classes. They are not widely owned, yet the supply is shrinking due to M&/A activity (which, in turn, is being fed by lower rates). Dividend yields are comparable to short-term bonds, but the upside for equities is much greater.
The bulk of wealth created in the U.S. is due to investor participation in the growth of the economy. Don’t get waylaid by commentators looking for a short-term dip—remember, bad news sells much better than good news. Now is the time to draw a line in the sand and stay invested.
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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