GOLDEN VALLEY, Minn. - When it comes to the stock market this year, so far so good. It has exhibited resilience in a variety of factors.
The question now is can it continue?
Dan Ament, financial advisor with Morgan Stanley of Wayzata joins KARE 11 Sunrise once again, to discuss some of the investment controversies that will be on investors' minds for the balance of the year.
Stock valuations: P/E expansion or contraction for the stock market? The humility / arrogance cocktail: Many investors we talk to think that more multiple expansion in the second half of the year is likely (price / earnings ratio .. which is the multiple of earnings investors are willing to pay exhibited by price of the stock), though many investors use a base case of less multiple expansion from here than we heard in the last 12 months. QE Matters - Our guess is that a number of things have been responsible for the recent market multiple expansion, but perhaps a major contributor was quantitative easing, which encompasses Fed and ECB policy. As the Fed tapers QE the question many wonder is will investors continue to justify current multiples and be willing to push them higher? So that being said, what is our forecast? Our best guess is that there will be modest further multiple expansion. This is also probably the consensus view.
Interest Rates: Will interest rates back up more and what are the implications? After Bernanke's initial comments, we found ourselves explaining the difference between tapering and tightening in a lot of our meetings. The severity of the back-up in rates was somewhat surprising to us given our core belief that the Fed will remain accommodative for some time, and it wasn't just the 10-year. Our view is that rates will not back up that much more in the near term. We are not so concerned about rates backing up to the point of slowing the housing or even the economic recovery. Moreover, we think the Fed will remain accommodative for another year.
Economic Growth: Will the US corporate sector contribute to economic growth? Our stance is that the corporate side will not materially kick in to help the economy in the second half of 2013. Manufacturing capacity utilization has risen sharply since the last recession but is still below both the long-term average and the highs of previous expansions So tactically, we don't think capital spending is likely to pick up based on the higher frequency data we analyze. Obviously, during this Q2 earnings season we will look for any signs of rising capital spending, or a need for it. Bottom line earnings and revenue results posted along with forward looking company statemetns will be closely watched.
China / Emerging Markets: Do we want US stocks with China exposure? At a recent investor conference, zero percent of survey responders thought owning US stocks with high EM exposure would be a positive in the second half of 2013. Is this the contrarian opportunity? Are there any China bulls? Our Global Economics Team forecasts stronger China GDP than any other major region in the world. We all know it isn't that simple, but we are increasingly thinking that US companies with exposure to China's faster growth will ultimately do well.
Europe: Should US investors care about Europe? Well it certainly seems like investor sentiment has shifted dramatically in two years. In 2011, Europe and the euro were going to break up, and global markets were in turmoil. Today, we would describe sentiment as indifferent. So will Europe matter in the second half of 2013? Our guess is probably not. We don't think the long-term structural issues will come to a head in the next few months. We don't see fear about Europe surfacing to the extent it did a couple of years ago. Complacent? Potentially. But we see no need to worry if the earnings don't fall off.
Economic sectors to watch: What economic sectors should you favor / avoid? Our overweight sectors are health care, industrials, and technology. We are recommending underweights in consumer discretionary and consumer staples, telecom and utilities.
(Copyright 2013 by KARE. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)