By Scott Reed
Amidst all of the negative news that continues to abound in the financial world, I have also heard investors who are having a change of heart – investors who are beginning to view the equity markets with optimism instead of pessimism.
Is it the result of an economy that is showing real signs of improvement? I don’t think so. But I do think the U.S. economy is showing real signs of improvement. I just don’t think that the average investor is feeling that yet. If they don’t feel it, they are going to have a hard time acting on it.
I have to believe that this shift in the conversation has more to do with the notion of “What else am I going to do?” than “This is a great time to buy stocks!”
It is hard to believe that this is a great time to buy stocks. We have already seen a net increase in the Dow Jones Industrial Average of almost 72 percent since it bottomed out in 2009. Article after article and story after story is promoting the concept of a double-dip recession. The only thing the pundits can agree on is that we are in it for the long haul. It will take time to get over what we have done to ourselves.
But while we wait until the economy builds up a new head of steam, we have to do something.
Even if you don’t believe that stock prices are going to get any better any time soon, it is hard to ignore the fact that many companies are coming to press with increased earnings each quarter.
Profits are rising and that means that valuations of many blue chip companies are rising, too. Is it enough to get the average investor back into the equity market? Maybe not, but when you add the fact that money market funds and savings accounts are paying just north of zero percent, dividend-paying stocks start looking like a very good place to hold your money while we get back on our feet.
While the 2-year Treasury yield is paying a whopping .24 percent, the 10-year 1.98 percent and the 30-year at 3.06 percent, the S&P 500 equity index has an average dividend yield based on its market value on Sept. 28,, of 2.11 percent.
If you calculate the same value for the Dow on the same date, the yield is even better at 3.21 percent.
There is no doubt that Treasury bonds are still considered the safest investment in the world and there also is no doubt that equities carry a considerable amount of risk. Even so, it is hard to ignore the fact that total earnings of the DJIA have grown from $624 in two years ago, $831 last year and to a trailing 12 months earnings as of Sept. 10 of $897.
If earnings are increasing, eventually the price of equities will follow. No one knows when they will follow, but history will tell you that they will follow in their own time.
You can’t participate in that rally if you are not invested in equities. Right now, one of the best yields you can get while you wait for the return of the equity markets might just be in the equity markets.
Scott Reed, CIMA, AIFA, is CEO of Hardy Reed in Tupelo.