Looking for Value; It's Everywhere
By: Dr. Charles Lieberman
Date: 11/3/2008
Stocks rebounded last week, mostly because they had just gotten too cheap. By some measures, equities are as cheap now as they have been at any time in the past 30 years. Still, investors remain nervous, reflecting October's plunge. There is much to worry about. The near-term economic outlook remains weak, as the disruptive effects of the credit crisis start have barely shown up in the economic data. Governments are wrestling with the credit crisis on a global basis. Stories abound on the meltdown in housing. Even so, a severe recession and an ongoing credit crisis are already priced into the market, although government policies, here and abroad, are aggressively addressing the problems. Investor sentiment is too negative, which implies that stock prices are exceptionally attractive, if investors can stomach the volatility.
Stocks were cheaper in the 1970s, but that era was burdened by very high inflation, which implies a lower equilibrium price earnings multiple. So that period isn't truly entirely comparable. As Fed policy worked to reduce inflation over the subsequent years, stock (and bond) performance was very strong. In fact, anytime stock valuations were at similar valuations, subsequent equity performance was well above average. The same is likely this time, as well.
Psychologically, it is very difficult for investors to remain invested when stock prices are falling so much, so quickly. As they see their net worth melt away, investors sell out, which turns unrealized losses into realized losses. Even worse, they are not in the market when it turns around, so they are unable to recapture those losses as stocks recover and must pay higher prices for equities when they regain the confidence to invest once again. Since that confidence returns only after stocks have rallied, investors who bail out now sell low and buy high, which devastates returns. This kind of behavior happens all too frequently.
Valuations are now depressed across the board. Stocks are cheap, but so are high-grade bonds, high yield bonds, and preferred stocks. Investors have fled anything perceived to be risky and, these days, that even includes money funds. Treasury bonds are the sole exception. For those who hang tough, most asset classes will produce above historical average long-term gains, although equities should perform best. Investors just need a little faith, which is tough when stocks are down so much and are sure to remain volatile for a while. Download this article in PDF Format
About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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