Janet Yellen at the Plate

It has been five years since the birth of the current global economic expansion and bull market in global stocks. As the economy continues to grow and stock prices grind ever so higher, many investors question just how long this period of prosperity can continue. In addition, will Janet Yellen, the new chairperson of the Federal Reserve, be as accommodating as her predecessor? Regardless, haven’t stock price gone too far…too fast?

Since it is nearly baseball season, we would suggest that the progress of the current global economic expansion and bull market can be likened to the bottom of the sixth inning. We are not early in the game and we are past the half-way point. One could say that 2/3rds of this period of prosperity is behind us and that we have a few more years ahead of us. The case for a continuation of the current progress lies in the improving economic fundamentals here in the US and Europe — together the bulk of the world’s capitalization. Improving economies drive corporate profits which in turn drive stock prices higher — so long as stocks are not overvalued, which they are not. The average price earnings ratio (P/E) for global equities is about 16. This is not a level historically associated with market “tops” and one could argue it is a P/E that signifies that global stocks are undervalued. Moreover, our research suggests that most investors have been in cash and bonds during this great rise and are only now starting to buy stocks. These data points suggest that there is more room for the bull to run further. Will this “ball game” last forever? No. All economic expansions and associated bull markets come to an end — normally after 7-9 years. Economic expansions end in recession and decline in stock prices — usually significant. Think 1972, 1983, 1990, 2002, 2008…you get the idea. That is why it is called a business cycle.

Could the new head of the Federal Reserve institute policies that could disrupt this period of prosperity or end this ball game? We highly doubt this possibility despite all the media attention it gets. Ms. Yellen is more like her predecessor Mr. Bernanke and will therefore keep monetary policy in a similar fashion. She will continue to reduce monetary stimulus and eventually she and the Federal Reserve will raise interest rates — the latter not likely until the early summer of 2015. These are all signs that the global economy is healthy and for that reason stock prices should continue to move higher — with corrections along the way.

The most important part of the last few “innings” of this economic expansion relates to those investors that have been dreaming of buying high quality bonds with attractive interest rates — something that has not existed for nearly 10 years! Over the next few years, your dreams may very well come true. Interest rates have already begun to rise and should continue — with a little help from the Fed.

Of course our vision of more time at the ball park under sunny skies could be derailed by an oncoming and unpredictable storm somewhere on the horizon. Therefore, we continue to manage this risk through your portfolio’s asset allocation, sector management and the use of carefully placed stop loss orders. While there is no guarantee, these tools are intended to mitigate the risk of catastrophic loss.

All of us appreciate your continued “vote of confidence.” We continue to manage your assets according to your stated objectives. Please let us know should your circumstances or investment objectives change. If you have any questions, please let us know.

Sincerely,

Your Team at Main Street Research