4 Reasons to Own Equities Now
Courtesy Hodges Capital, N. Dallas LIVING WELL Magazine
Earnings Yield Disconnect
As of March 8, 2013, the S&P 500 is expected to earn about $110 over the next 12 months. With the S&P 500 trading around 1500, the index trades at a multiple of about 13.5 times earnings. If we take the inverse of this we get about a 7.5% earning yield. Where else can you bet that type of return? Ten year treasury notes yield about 2%, corporate bonds yield about 3.25%. We believe your clients should be overweight equities until we see the discrepancy between the two asset classes shrink.
Increasing Equity Demand
Net New Cash Flow to Equity Funds Related to Global Stock Price Performance
1Net new cash flow to equity funds is plotted as a six-month moving average.
2The total return on equities is measured as the year-over-year change in the MSCI All Country World Daily Total Return Index.
Sources: Investment Company Institute and Morgan Stanley Capital International.
Due to exorbitant amounts of fear in the market, we saw six straight years of equity outflows totaling $479 billion by the end of 2012. In comparison, investors have added $745 billion to bond funds since 2009. However, a shift has occurred since the first of the year in investor sentiment and almost $29 billion has been invested in equities over the first two months of the year. Also note the consistency of this developing trend: we have witnessed domestic equity inflows seven of the last nine weeks. Equity demand should only intensify when the Fed ends its bond buying effort and interest rates rise.
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Established in 1974, the Wilshire 5000 is built to represent the entirety of the stock market including the NYSE, the AMEX, and the NASDAQ––totaling about 5000 holdings (hence the name). You can see what it has done since then. A smaller number of names lends itself to more dollar concentration on each individual stock. More dollar concentration means higher stock prices.
While many of you may be adverse to equities due to the substantial corrections in 2000, 2002 and 2008, equity investing has still turned out to be a profitable investment over the long run. If you were invested in the S&P 500 from 1990 to the end of 2012, you would have made 355% on your money, or almost 8% annualized.
We at Hodges Capital Management believe that opportunities exist for active investment managers to capture excess returns in equities in just about every type of stock market. However, such opportunities do come in various forms at different points throughout a market’s cycle and require in-depth research. In most cases, this means going straight to the source for information in an effort to truly understand what’s going on in the underlying, unique businesses. These efforts require the time intensive analysis of financial statements, interviewing of management teams, visits with customers and suppliers, as well as an acute awareness of the competitive landscape.
For more information, you can contact Hodges Capital Management at (888) 878-4426 or visit their website at hodgescapital.com.
Disclaimer: The information contained herein is not intended to be a forecast of future events or a guarantee of future results and should not be considered a recommendation to buy or sell any security. Investing involves risk. Principal loss is possible. Investing in smaller companies involves additional risks such as limited liquidity and greater volatility. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Russell 2000 Index consists of the smallest 2,000 companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as ranked by market capitalization. You cannot invest directly in an index.