Portfolio Manager Charlie Dreifus believes investors should pay closer attention to GDP growth, and stop worrying about interest rates rising.
Watch the video here.
Steve Lipper: Let’s talk about the concerns a variety of investors have about the market. There are quite a number of them. From your perspective, what’s a concern investors seem to have that you think maybe they shouldn’t be concerned about?
Charlie Dreifus: Well, I think probably on the top of that list would be interest rates. The concern about interest rates rising– if they’re rising because the economy is improving. There are enough signs to suggest that it’s timely to raise rates because of the strengthening in the economy.
That’s actually a good thing and something we need. Furthermore, the rate increase and subsequent ones are unlikely to be dramatic enough to really alter anything in any dramatic way. So, there is this over focusing and, and preoccupation with the Federal Reserve, number one, and what they are likely to do with interest rates, number two.
Steve: So let’s go to the other side. What is something that investors are less concerned about now that you think they should be paying more attention to?
Charlie: Well investors, including many professional investors, I think, have not paid enough attention to the transmission mechanism between GDP growth in various economies. Most importantly to us, the U.S., of course, and how that impacts revenue growth at companies which results ultimately, in higher net income.
The market is expensive but it would be less expensive if earnings were higher. So if policymakers in the United States as well as around the world would be able to come up with a plan that causes the economies to grow more rapidly, the central banks have tried now for eight years, they’ve gotten very creative with very little result on the real economy.
Yes, asset prices have risen, but the economy has been very slow, lethargic. The other thing that I think people are not paying enough attention to, and again, may have been misled in terms of earnings particularly, is governance.
There’s a lot being done these days that ends up inflating earnings. So the earnings that are being used to justify the valuation, I believe, are somewhat inflated and therefore, the market is actually even more expensive and thus even the greater is the need for economic growth.
Article by Charlie Dreifus, The Royce Funds