5 Reasons to Stick with Stocks 

Kristina Hooper 

The Upshot 

4/29/2013 

Investors who question the current stock-market rally or fear getting in at the top should follow the Fed’s lead and focus on staying ahead of inflation, writes Kristina Hooper.
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Kristina Hooper, CFP®, CAIA, CIMA®, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

We're just four months into 2013 and the S&P 500 has posted a year-to-date total return of 11.65%. That's certainly a nice return and yet the general sentiment among equity investors is far from positive. They're uneasy. They lack conviction. And they're waiting for a correction. Investors' lack of faith is evident in their behavior, bidding up defensive stocks—health care and utilities—while shunning cyclicals.

Stocks Vs Bonds

An even larger group of investors believe they have missed the multi-year rally and are hesitant to get in near the top. Symptoms of this sentiment can be seen in equity mutual fund flows, which remain tepid. For the first three months of 2013, we saw less money going into stock funds than bond funds: $79.7 billion in net flows have gone into stock funds (including both domestic and international) while $81.2 billion in net flows have gone into bond funds (including both taxable and tax free.)

Where the Flows are Going

Stunted Growth

Worries about the sustainability of the current rally are perhaps justified. The initial estimate of first-quarter GDP growth, at 2.5%, came in well below expectations. This disappointment was compounded by whispers that first-quarter growth will be “as good as it gets” for 2013 given reduced government spending and slow strides in the labor market.

On top of the macro issues, corporate earnings also pose a challenge. It was a big week for earnings reports but the news wasn't all good. While 73% of companies reporting earnings have exceeded mean expectations, only 44% of S&P 500 companies have reported revenues above the mean estimate. This statistic is disappointing given that, over the past four years, 57% of companies beat mean revenue estimates.

But there is an old adage used by athletes and dieters alike that is fitting for today's investor: “If it doesn't hurt, it's not working.” Investors feeling uneasy about stocks, despite strong performance, may be a sign that this bull-market rally has legs. Historically, when investors have been decidedly bullish on the stock market, it has signaled a top.

Stocks for the Long Run

But what about all those investors who haven't moved back into equities yet and are asking if it's too late to get in? Well, it's never too late if your time horizon is long, especially if you dollar cost average. Stocks, despite their volatility, arguably have a more attractive risk/reward profile today than other asset classes. Here are five key reasons to own stocks for the long term:

1
Valuation
- The current forward 12-month P/E ratio for the S&P 500 is 13.9, which is below the prior 10-year average forward 12-month P/E ratio of 14.2.

2
Improved fundamentals
- Companies have cut costs and are realizing far greater operating efficiencies. In addition, they are enjoying lower debt-servicing costs. That’s why they’ve been able to overwhelmingly meet or beat earnings estimates despite top-line growth that has underwhelmed. So while it may seem like a negative sign to have lackluster top-line growth, it is encouraging to see companies achieve operating efficiencies. It indicates that they will be well positioned to weather economic downturns.

3
Dividends
- For calendar year 2012, S&P 500 companies paid out $310.5 billion in dividends, which is a 10-year high for trailing 12-month periods. What’s more, dividends are experiencing year-over-year growth of 15.9%. With dividends still offering tax advantages over other sources of income, dividend-paying stocks look attractive.

4
The specter of inflation
- Inflation has been modest, but history has shown that significant stimulus tends to result in substantial inflation. Stocks have typically held up well in inflationary environments, particularly dividend-paying stocks, which have grown their dividends, on average, a percentage point higher than the consumer price index (CPI). Research conducted by Allianz Global Investors shows that, as long as inflation is below 4%, stocks produce positive real returns

5
A supportive Fed
- It looks like the Fed will maintain an accommodative stance in the near term. Government-spending reductions are slowing the economic recovery, which was reflected in the weaker-than-expected GDP growth. While slower progress is not good for the economy, it bodes well for a continuation of “easy money” policies. With the recovery unsteady and unemployment high, the Fed is unlikely to reduce its asset purchases or increase interest rates any time soon. Despite the substantial run-up in equities over the past few years, long-term investors should benefit from significant exposure to stocks. For now, central-bank intervention continues to make it even more sensible to stick with stocks.

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The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.


A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
 
Gross domestic product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index.

The Standard & Poor’s 500 Composite Index (S&P 500) is an unmanaged index that is generally representative of the U.S. stock market.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585, us.allianzgi.com, 1-800-926-4456.

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