Sep 24, 2020
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Why Now’s The Time To Make Money In The Stock Market

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You hear for all time that the long-running bull market must run out of energy soon. But Nicholas Atkeson and Andrew Houghton the founding principals of Delta Investment Management show with simple math why the market still has numerous opportunity to make money: There’s a time to harvest and a time to sow


Investing is a thoughtful activity. If you don t have an investment thesis that’s the output of a valid investing process then don t invest. It s that simple. During times when your disciplined investment process shows positive expected returns invest (sow). Shutterstock What is our current investment thesis? Now is a time to make money: Earnings are expected to be up roughly 22% year-over-year in 2017


The 1st quarter earnings season positively reinforced this expectation. There are no significant signs of recession in the next six months. International economies are expanding – clearly good for international stocks and global growth benefits U. S. stocks especially large capitalization stocks with international exposure. Low bond returns continue to make stocks relatively attractive – the Fed Model


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A New Partnership Aims To Help The Fed Model is a casual model that came into being in a Federal Reserve report issued in 1997. The model compares the stock market s earnings yield (earnings/price or E/P) to the yield on 10-year Treasury bonds. The Fed Model states that bond and stock market are in equilibrium fairly valued when the one-year forward-looking earnings yield equals the 10-year Treasury yield


The Fed Model is a simple tool to measure attractiveness of stocks. The 10-year Treasury yield is roughly 2. 2%. The earnings yield of the S&P 500 is 5. 4% (2017 estimated operating earnings estimate is $131. 77 divided by S&P 500 index 2 430 equals 5. 4%). According to the Fed Model stocks are attractive


The Fed Model shows stocks and bonds are fairly valued by comparing their yields. DELTA INVESTMENT MANAGEMENT If we change the Fed Model by replacing 10-year Treasury yield with the company Baa (lower medium grade) bond yield stocks remain attractive on a relative yield basis. Since the beginning of the year interest rates have notched lower and earnings were revised higher making stocks even more attractive


It’s the Fed Model adjusted to sub in corporate bonds. The result’s the same. DELTA INVESTMENT MANAGEMENT Why would we change the Fed Model to apply corporate bonds rather than government bonds? The main reason is to compare the risk level of the bonds with stocks. U. S. government bonds are considered to have very low default risk as the U


S. Treasury can print money to repay the bonds. Corporations can t print money. Corporations can t absolutely guarantee bond repayment or future earnings projections. Through Baa rated corporate bonds we believe we’ve matched the bond default risk to the earnings risk of the S&P 500. During a May 8 interview with CNBC Warren Buffett talked about the importance of interest rates when considering stock valuation


Buffett stated that the valuation of stocks is driven in part by interest rates because the value of businesses is according to the discounted value in their cash flows. Stocks are dirt cheap Buffett said if rates stay around current levels or increase only modestly over the next 10-plus years


Now is a time to be invested. However the investment landscape is always changing. Every working day we monitor the landscape seeking evidence that the make money today investment thesis is at risk. In time and with certainty the market will eventually transition to a time not to lose money


That isn t now though

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