Federated Investors Hopeful About Stocks’ Summer Doldrums

Written by WrapManager's Investment Policy Committee | July 13, 2017

While extremely low headline volatility of late may be putting some investors to sleep, beneath the surface, there has been a healthy and ongoing rotation among market sectors that should continue into the fall, pulling the S&P 500 ever higher toward our near-term 2,500 and long-term 3,000 targets. The reasons are three-fold: the economic backdrop is still solid; credit and liquidity conditions remain good; and politics and the Fed appear set to work together and revive the “Trump trade” in coming months. So stay long stocks. Add to industrials, financials and health care. And don’t abandon tech yet—there’s more to come in the next 12 months. Continue reading for additional insights:

Valuations are not excessive by any stretch. A well-kept secret that few people talk about is that most of the market’s 200% rise off the 2009 lows has been bought and paid for with earnings growth of a like magnitude. On consensus earnings for the next 12 months, the S&P is trading at an 18 forward P/E. And against Federated’s expectations for 2019 earnings, the market is trading at 16.5 multiple. While not dirt-cheap, these levels are neither expensive nor remotely excessive given the strong fundamental backdrop. Our forecast of 3,000 on the S&P by sometime in late 2018 or 2019 implies a stock multiple at 20 P/E, which is reasonable as long as interest rates rise in the slow and gradual pattern we expect. Bottom line, valuations do not imply we are anywhere near a market top.

Despite recent modest softening in some indicators, the domestic growth outlook remains favorable and most overseas economies are stable to accelerating. For sure, U.S. numbers are a bit lighter, especially in autos, but also in durables, retail sales and even housing somewhat. But all are lighter off strong levels, while confidence gauges—an important forward indicator—remain elevated. Overseas, the numbers are better, especially for Europe and China, the two biggest economies next to ours. With employment low and inventories across the economy reasonably tight, there is little to no reason to expect an economic slowdown in the next 12 months, making for a supportive backdrop for stocks.

Cautious sentiment, high cash levels and continuing M&A activity are all equity supportive. Judging investors by what they do and not what they say, the Wall of Worry a market needs to fuel a rise remains very much in place. Though not at all-time highs, retail and institutional cash levels remain elevated. Virtually all the clients I speak with are cautious and, frankly, under-invested in the market. And in the real economy, companies remain awash in cash, credit spreads are low, and mergers and acquisitions are very much alive and well. All of this is suggestive of a market that grinds higher, not lower.

For the complete analysis, download Federated Investors complete commentary. Or, review BlackRock's thoughts on momentum equity trading in the current economic environment.

To learn more about Federated Investors and other Money Managers, give us a call at 1-800-541-7774 or contact us here to speak with a knowledgeable Investor Consultant.

Read Federated Investor's full commentary here.

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