The second quarter for the year has come to an end and I wanted to send a note summarizing events of the past three months. Here's a quick recap on the first quarter.
Developed markets registered solid gains in the first quarter, despite the setback from March's earthquake and tsunami in Japan. The second quarter was a different story, with concerns arising from growing inflation threats in emerging markets, sovereign debt worries in Europe and a downgrading of growth forecasts for the global economy.
Developed markets registered solid gains in the first quarter, despite the setback from March's earthquake and tsunami in Japan. The second quarter was a different story, with concerns arising from growing inflation threats in emerging markets, sovereign debt worries in Europe and a downgrading of growth forecasts for the global economy.
Given the recent concerns about European debt and uncertainty about economic growth, I am sharing recent perspectives from three of today's most respected stock market observers: Warren Buffett; Morningstar fixed income manager of the decade Bill Gross; and Wharton researcher Jeremy Siegel, considered today's leading stock market historian.
Warren Buffett - "Betting on America"
"Money will always flow toward opportunity and there is an abundance of that in America .... Human potential is far from exhausted and the American system for unleashing that potential ... remains alive and effective.” - Warren Buffett, Berkshire Hathaway Letter to Shareholders - February 2011
Buffett has been consistent in his positive outlook for the U.S. economy, looking past short term events to focus on American ingenuity and resolve and its ability to attract the best and the brightest from around the world. He is consistently voted the greatest investor of all time. In the 46 years he's run Berkshire Hathaway, annual growth in book value has exceeded 20%, more than twice the gains for the U.S. stock market index. Even more remarkable, Buffett's numbers are after tax, while the index's gains are pretax. And while he lagged in individual years, in his last letter to shareholders Buffett pointed out that there has never been a five year period where Berkshire Hathaway underperformed the S & P.
To put his record into dollar terms, $1000 invested in the Standard & Poors index of US stocks at the start of 1965 would have risen by the end of 2010 to $62,620. By contrast, that same $1000 under Buffett's stewardship would have grown to over $4 million.
Bill Gross - "The case for stocks that pay dividends"
"In terms of the stock market, there are amazing opportunities ... (compared to US government bonds) there's a huge gap and a huge differential." - Bill Gross, CNBC - June 7, 2011
My second expert is a household name among professional investors. As manager of PIMCO Total Return Fund, the world's largest bond fund, Bill Gross turned in a track record matched by few others and was named Morningstar Fixed Income Manager of the Decade. In part, this stems from his willingness to take contrarian views; in 2010, he went on record talking about the "new normal" of lower growth, higher inflation and increased risk in holding debt of governments around the world.
In a June 7 interview on CNBC, he discussed the appeal of brand name stocks that pay dividends:
"A Procter, a Johnson & Johnson, a utility company, Southern, Duke, as a whole they yield 3.5 -4% in terms of their dividend yield compared to a -0.5% in treasury space on that five-year. Corporations are in the catbird seat. They've got cheap financing, cheap leverage. They've got cheap labor and the ability to move from one country to another at their will. I think corporations basically are at the top in terms of profit margins. Doesn't mean that stocks are going to go down. It means that the catbird seat basically has been taken advantage of and that the heyday is probably in the past as opposed to the future."
Jeremy Siegel - "Why valuations are attractive"
"We've almost never seen valuations (on the US stock market) this low when interest rates are as low as they are today....relative to bonds today, I've almost never seen such compelling values.” -
Professor Jeremy Siegel, Business News Network - June 28, 2011
My third expert is Wharton's Jeremy Siegel, considered today's leading stock market historian. His book ‘Stocks for the Long Run’ examined 200 years of financial market performance and has been ranked as one of the most influential investment texts of all time. Among Siegel's claims to fame is an article in the Wall Street Journal in March of 2000, at the peak of the Internet bubble, warning about the excesses in tech stock valuations.
Here's why he, like Bill Gross, likes dividend paying stocks:
"History shows that dividend paying stocks beat inflation and are good investments for income, especially in the early stages of a financial recovery such as we see today ... The top one hundred dividend yielding stocks of the S & P 500 over the last half century beat the index by two and a half percent and did so with lower risk."
What this means to you
In today's low interest rate environment, it's hard to make a compelling case for cash except as a portfolio diversifier and a source of liquidity. As for bonds, Bill Gross represents the growing sentiment that the risk in bonds is greater than the reward, as economies recover and interest rates start to rise.
Whether you adopt Bill Gross' "least of evils" view of stocks compared to bonds or join Warren Buffett and Jeremy Siegel in embracing stocks more enthusiastically, there are clear values in high quality stocks that pay dependable dividends. Today, you can find quality companies with strong cash flows that provide a comfortable backing for their dividends and also have the potential for dividend growth.
As always, I am here to talk about any questions you have about the markets and to discuss your portfolio.
Hope your summer is enjoyable. All the best,
Eric
