The Case For Stocks

8/28/2017


This is not an ideal time to invest. Bonds and money-market funds offer puny yields. Stocks are expensive after rising for most of the past eight years. The U.S. economic expansion that began in June 2009 is already the third-longest on record, and the Federal Reserve has been raising short-term interest rates.

Still, you can only invest now. Whether you think about it or not, every day you're making a decision on where to put your money. Waiting for a better time to invest as cash builds in your checking account may be the right call, but you're likely to do better over the long haul if you make such decisions consciously. 

Our buy lists have 92% to 95% in stocks. Of the portion of your portfolio allocated to equities, we'd suggest holding 92% to 95% in stocks, with the rest in a short-term bond fund. Here's why:

The long-term record. Because stocks are volatile — and investors demand compensation for holding risky assets — stocks tend to provide the best long-term returns. Using calendar-year returns, U.S. large-company stocks have outperformed intermediate-term Treasury bonds in all but one of the 72 rolling 20-year periods since 1926, according to Ibbotson Associates.

Timing the market is difficult, and doing it in an all-or-nothing fashion is doubly so. Even when we've been bearish, we've kept more than half of our portfolio in stocks. That's because we know that we don't always get it right — and that jumping between 0% and 100% stocks is among the best ways to trash your long-term returns.

The Dow Theory. The last important signal under the Dow Theory came in July, when both the Dow Industrials and Dow Transports closed at all-time highs to reconfirm the bullish primary trend. Since then the Transports have suffered a significant correction, but the Industrials have not. While we'd like to see better action from the Transports and other cyclicals, it is not surprising to see these groups pull back after big rallies.

Investors don't seem euphoric. At bull-market tops, investors tend to be unusually optimistic. That is not the case today. Investment newsletters have responded to the market's recent dip with a sharp decline in bullishness, according to Investors Intelligence. Among individual investors, 34% were bullish in the latest weekly survey by the American Association of Individual Investors — below the norm of 38% since 1987.

Reasonably valued growers are available. Investors are paying up for low-volatility stocks and giant growth stocks. But, on average, the stocks on our buy lists trade at below-average valuations despite superior operating momentum and expected growth rates. To a large extent, that is because we are overweighting the consumer-discretionary, financials, health-care, and technology sectors. If we could find more attractive names outside these sectors, we'd be more inclined to raise our equity exposure to 100%.


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