The federal funds rate is unlikely to see a meaningful change until 2015, boosting equities.
And yet, equities currently have the highest returns and the greatest liquidity.
This should lead to more M&A as companies scramble to enlarge footprints, enter new markets and build greater economies of scale. “Balance sheets have never been stronger.”
The dividend payout ratio remains low at around 30 percent of earnings, leaving plenty of upside for increases, Ward said. Historically (going back to 1926) the dividend payout ratio averaged 58 percent of earnings.
“As bad as the sequestration is, it is arguably the best legislation produced thus far by this Congresss and signed by this president,” Ward said, half joking. He predicts the result of the 2014 mid-term elections will be more gridlock. “That means no dramatic change in policies, and in this environment, we have to consider that a win.”
Stocks have traditionally traded at 15 times forward earnings. The 10-year Treasury is selling at a 2.7 percent yield, well below its historical average of 6 percent.
Inflation is expected to be around 2 percent in 2014, possibly supporting expansion of price-to-earnings ratios from the current 15 times to possibly 16 or 17 times - more typical of an environment of 2 percent inflation, Ward said.
But recent double-digits returns are unsustainable, Ward said. “Investors entering the market now should strongly consider dollar cost averaging to reduce risk.”
Howard Ward, director of growth equities at GAMCO Investors, kicked off Schwab IMPACT’s opening session this morning in Washington, D.C. with 10 reasons investors should be in the stock market now.
To view more coverage of IMPACT 2013, click here.
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