Review & Outlook

Our take on the investing, financial, & economic themes of the day

Getting off the Sidelines

25 April, 2011 by Ben O'Brien in Commentary

The 5% climb in stock prices last quarter made it the best first quarter in the last 13 years.  So far in the second quarter of 2011 stocks are up another 1.5%.  And then stocks rose 11 to 13% in full year 2010 and over 20% in full year 2009.  In relatively short order the stock market has recovered the losses of the great 2008 crash, which was the worst in some 80 years.

For many individual and institutional investors, though, these strong performance statistics are cold comfort.  That’s because they have been on the sidelines, for whatever reason, in money market funds or CD’s, which pay microscopic yields.  Meanwhile inflation has been rising and the value of the dollar falling, altogether working a double whammy on the purchasing power of savings.   But people would sooner have the capital erosion of inflation or a weak dollar than the collapse of a market top.  Thus they sit on the sideline wondering when is the right time to jump in.

It’s a tough spot to be in, but I would not hesitate to use this time to get started, gradually. Yes, there are big problems out there; I won’t go into them right now; I have done that elsewhere.  But one can still buy into this stock market confident that such blue chip stocks as Abbott Labs and Johnson & Johnson and Intel, McDonalds, Coca Cola (to name just a few) represent good long term value.  Even after recent gains, these stocks have dividend yields that exceed the yield of a ten-year Treasury bond and they still have price-earnings ratios (a measure of the relative expensiveness of stocks) below historical averages.  To be sure, I would avoid the companies and sectors that have done really well, like Apple or energy explorer Schlumberger, or emerging market stocks or small-cap stocks or gold stocks.

There are bonds I would buy as well, like high-quality taxable and tax-free municipal bonds in “good” states, and A-rated corporate bonds.  They have yields in the 4% and even 5% range.  What would I avoid in the bond market? U.S. Treasury notes and bonds look very expensive.  Preferred stock (despite its name is a kind of bond) and mortgage-backed securities look accident-prone as well.

But one should get started.  The future is never clear, the outlook never certain. It may take 6 or 9 months to get into the market, but I would not hesitate to get going even now.

Mark O’Brien