Dorion-Gray: Take advantage of opportunities unfolding in front of you
When listening to all the 24/7 noise about the financial markets and especially this 50-month-long bull market for stocks, it always appears that the loudest noise has come from what I will call the perma-bears. They have been screaming that the sky is going to fall any minute for millions of minutes now – and yes, they will be right eventually, going down in the history books for calling the next big stock market collapse when it does eventually happen.
I, personally, think it is better to spend one’s time playing the game in front of you with a solid financial and investment plan that prepares for the eventualities while allowing one to take advantage of the current game unfolding in front of you.
This market has grown steadily through periods of high volatility and with consistent low trading volume. Many are saying that low volume is a sign of market weakness. Maybe it just means that fewer are playing the game that is in front of them.
You invest in the stock market to share in a part of a corporation’s future earnings. We have had a strong run-up in corporate earnings since the market low on March 9, 2009. The run-up in profits has been due to a very accommodative (money printing) Fed policy that has reduced the cost of money for large corporations for many years to come and still today affords great advantage to both public corporations and private equity firms. At the same time, smaller, privately held corporations and small businesses have to go to heavily regulated banks where risk is a bad word and credit worthiness is narrowly defined by distant regulators instead of knowledgeable local bankers. Think Apple: a few weeks ago Apple (with approximately $145 billion in cash) borrowed for the first time in 20 years around $17 billion – a large part of it in 10-year bonds at around 2.4 percent. The stated purpose of the borrowing was to pay a special dividend to stockholders.
Further, large corporations have reduced payrolls, generally their largest expense item, and found that they can not only increase margins and profitability, but they can even now grow revenue with greater efficiency and fewer people.
Many corporations have been going to the bond markets for cheap cash and using the cash to repurchase shares. Repurchasing shares increases profits per share while decreasing overall dividend payments. Dividends are paid with after-tax dollars; interest on bonds are paid with before-tax dollars. Fewer shares with higher profit per share generally helps raise overall share prices.
Large corporations continue to acquire or merge with one another. This allows corporations to eliminate redundancies in the operations while reducing personnel and increasing efficiencies in other areas of their operations. It also reduces the number of public corporations and thus the availability of shares available to purchase. Fewer shares available generally increase the demand and thus value per share.
Private equity also benefits as it can easily raise money by offering higher returns than Treasuries, bank savings, or even corporate or municipal bonds. For the most part, due to federal regulations to protect consumers and investors, only accredited (wealthy) Investors can generally participate in these types of investments. The benefit of private equity ownership of business is generally less reporting and other regulatory scrutiny and the associated savings in both time and money. Obviously, this further reduces the number of public companies and shares available.
By keeping federal rates low, the Federal Reserve banks are intentionally forcing eligible and available money to go to higher risk investments in search of higher yields, which is a plus to further GDP growth and thus an overall growth in wealth and standard of living.
A lot of the noise claims that U.S. stocks are too expensive, but studying historical and current evaluations by just about any metric possible continues to point to our stock market and many others around the world as being presently undervalued.
With the U.S. currently in the enviable position of being the “best house on an ugly block” due to the European Central Bank and the Bank of Japan’s even more aggressive money printing, the U.S. dollar has been strengthening as of late. A strong dollar has generally encouraged more foreign money to come into the U.S. equity markets in search of better yields. This will only push our stock values higher.
Lastly, the economy has continued to grow at a steady but below-average pace and will continue as any signs of dropping back into recession fall further behind us. If and when the economy starts to move back up above trend then there will be only more reasons for the equity markets to continue to move up.
This does not mean that the stock markets will continue up in a straight line. There always will be minor tops, consolidations, pullbacks and sideways trading, among many other possibilities. Nor am I suggesting that all run out and purchase stock right away. As I mentioned above, it is always of the utmost importance to have a solid financial, retirement, and investment plan that allows for covering current needs in the safest way possible with flexibility to take advantage of what the markets are offering in a timely manner.
• Please send any financial questions you wish to have answered in this column to Dorion-Gray Retirement Planning Inc., 2602 Route 176, Crystal Lake, 60014. You may also fax them to 815-455-4989 or email firstname.lastname@example.org. Paula Dorion-Gray, CFP, is a Registered Representative of Securities America Inc., member FINRA/SIPC.