Are Stock Markets Near ‘Dangerous Territory’? Q&A With Bill Nygren
This interview has been edited for length and clarity.
How do you characterize the market we’re in now? And how are you navigating it?
Bill Nygren: When you think about where we are now in the market, go backward. The market has increased by 2.5 times from where it was six years ago. So if you thought it was at an appropriate level six years ago, then it’s easy to conclude that we must be abnormally high now and in dangerous territory. Our view six years ago was that we had a buying opportunity. We went from a period where we had very low price to earnings ratios on very low earnings to numbers that are more like normal. P/E now is in the mid to upper teens, that’s about what it’s averaged historically.
Some people interpret the market as fairly valued and think it must be time to sell. We would think that a fairly valued market means you should expect returns going forward that are about average. And average has been a [few percentage points] a year more than you can get in intermediate term bonds. So it’s not a super exciting number, compared to it tripling over the last six years. But I think an equity investor today who is invested for the long-term can expect a mid- to upper-single digit minimum return in the market. I think there are certain areas where investors are still skeptical because performance was so poor six years ago, like financials, where if you tilt your portfolio in that direction you’re likely to do better than the market.
Let’s talk more about that. Citigroup, Bank of America and JPMorgan are in your top 10 holdings in the Oakmark Select fund. Tell me why you’re investing so heavily in financials.
Bill Nygren: To start with, the average large bank today is selling around book value or below it. Most of them believe they can earn a double-digit return after all of the legacy mortgage costs have worked their way through the income statement and after we get to somewhat more typical short-term interest rates — it’s unlikely that they’re going to be zero forever.
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