Today we have a special Thanksgiving edition. Morningstar markets editor Jeremy Glaser is here with five things that are on investors’ plates.
Jeremy, thanks for joining me.
But when we look to Europe, the question is a little bit more interesting. Mario Draghi, the head of the ECB, has been talking up the fact that the ECB is ready to have more aggressive asset purchases; they are ready to act to try to get European growth going again and to keep inflation from becoming any lower than its already very low level.
But Draghi faces a lot more structural and political impediments to actually implementing these policies than, say, you have in the U.S. or Japan. So, it will be fascinating to watch if he is actually able to back up his statements with these actions over the next couple of months, and if they have the desired effect.
We have a lot of issues here from affordability to access to credit to a mismatch between the kind of homes that are being built and that are available, and the ones that people want. Those issues continue to hold housing back.
Housing is important to the broader economy, and if can get housing starts back to a more normalized level--even if it’s below where it was at the peak before the financial crisis--that really could be a big boost to growth.
We’re looking for signs that housing is ready to start turning around. We got glimmers of hope from Home Depot and Lowe’s, who, in their earnings calls, said that they are starting to see some more confidence in the housing market, but it might take some time to see that confidence translate into real numbers, into better economic growth, and into a real tailwind for the U.S. economy.
Our bottom-up analysis on the equity market shows that the median stock is trading at about 3% over its intrinsic value. If you look at the market in some other ways, it could look even more overvalued. Suffice it to say, there just is no margin of safety. Things are really priced for perfection at the moment. There is not a lot of room for things to go wrong.
So, what should investors do? That’s a much more challenging question. Trying to time the market is exceedingly difficult, and as we’re seen in the data for years, investors tend not to do a very good job of it. When you look at alternatives, like cash or fixed income, the return prospects in those asset classes don’t look all that appealing, either.
I think you could do a lot worse than owning really high-quality companies that you’re buying at a fair price and that you intend to hold for a long time. There are a lot worse things in the world than doing that. But if you are, I think you need to keep a few things in mind. First, returns going forward are going to be much lower. Stocks at this level just aren’t priced to produce the kind of gaudy equity returns that we’ve seen over the last couple of years; be prepared for that.
Secondly, there could be a lot more volatility. At this valuation level if something does go wrong, you could see some big sell-offs, and you could see a correction. You need to be prepared both emotionally and financially to weather that.
We think some wide-moat names such as Procter & Gamble and Baxter are the kind of companies that are high quality and that are also selling at fair prices right now.
It would be a little bit ironic that as the U.S. economy continues to do better than it has been, U.S. corporate earnings actually might not look quite as strong.
Lower oil prices have some benefits for the United States’ economy. Certainly lower gas prices could mean some good things for consumption and consumer spending. But it has hurt the energy companies. We’ve seen some big declines in a lot of the energy names. We think the energy sector looks the most undervalued right now at 12% below fair value. That’s not an enormous discount, but certainly a discount, which is more than you can say about the rest of the market. And there are some wide-moat names, like Schlumberger in the oil services space, that do look like they are pretty attractively priced now.
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