Gabelli Funds: Top 10 Reasons to Buy Stocks for 2015
- The US. Economy is poised for its fifth consecutive year of record GDP and profits in 2015. Consumer spending will be stimulated by lower gas prices, lower mortgage rates (at least early in year) and rising employment levels.
- While QE has ended in the U.S., monetary policy remains extremely accommodative. Interest rates should stay near current low levels given 2% inflation expectations and even less attractive bond yields abroad, as foreign investors gravitate to our bond market to capture relatively higher yields and what we expect to be a stronger currency relative to the euro and the yen.
- Equity markets should benefit from the injection of additional liquidity stemming from new stimulus measures in Japan and Europe. Japanese stimulus goes beyond monetary easing and targets higher domestic and foreign equity weightings for its $1.1 trillion government pension plan.
- China has entered a multi-year period of declining investment as it pivots toward a more consumer driven economy. This bodes well for containing oil and industrial commodity prices for a period of years. Combined with limited wage rate gains, the inflation outlook is excellent, enhancing the likelihood that forward P/E ratios may expand from 15-16 to 16-17 or greater.
- Stocks remain under-owned. Households, with $47 trillion in financial assets are 42% invested in stocks, compared with 53% in 2000, when the 10-year Treasury yield was 6%, compared to less than 3% today. Pension funds, with $14 trillion in assets, are 37% invested in stocks, versus 50% at their previous peak in 1987, when the 10-year yield was 9%. Some institutions are now rethinking their allocation to hedge funds, many of which have trailed market returns over this past market cycle from 2007 to the present.
- Stocks remain attractively priced relative to bonds. On a price to forward earnings basis, stocks sell near their historical average of about 15 times earnings. The 10-year Treasury is yielding 2.3% (or 43 times its coupon), below last year’s level of 2.8% and well below its historical average of about 6%. This means the hurdle rate for stocks remains well below average
- With record cash levels, companies should continue to reward shareholders with share buybacks and dividend increases. The dividend payout ratio is 32%, well below the historic average of 58%, dating back to 1926. Dividends remain a tax advantaged source of income and income growth. Since 2010, net equity issuance is -$891 billion as buybacks and acquisitions have overwhelmed new issuance.
- The market should continue to enjoy gridlock, as the White House and Congress will be split. It remains to be seen if the President will move toward the center to enact corporate tax reform but such a move would be a positive surprise. Expectations for any help from Washington are low.
- Mergers and acquisitions will continue to be driven by rising confidence, low cost capital, tax motivations and strategic rationales, especially in the global arena. More companies seek to grow by acquisition or engage in financial engineering activities in slow to moderate growth environments like the present, when organic growth is more challenging.
- Estimated investment returns continue to favor stocks. Money market funds yield close to nothing. Bond returns are unlikely to exceed the inflation rate and could easily prove negative over the course of the year. Stocks are unlikely to peak for this cycle until stock valuations and allocations are higher and annual wage inflation is at least north of 3%, if not 4%, giving rise to inflation concerns. Wage rate increases are currently trending around 2%. Capital will continue to chase returns at a variable rate.
By Howard Ward, CFA
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GAMCO Growth Fund
GAMCO Global Growth Fund
Important disclosure information on back
The Gabelli Mutual Funds are distributed by G.distributors, LLC., a registered broker-dealer and member of FINRA.
Gabelli Funds and GAMCO Investors, Inc. is providing this material as a matter of general information. Howard F. Ward is Head of Growth Equities and a Portfolio Manager at GAMCO Investors. Mr. Ward’s views are subject to change at any time based on market and other conditions. This information represents the opinions of Mr. Ward only and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Mr. Ward’s views may differ from those of other investment professionals or of the Firm as a whole.
Stocks are subject to market, economical and business risks that cause the prices to fluctuate. Bonds, if held to maturity, have the ability to return the principal investment while stocks make no such offer. Also, unlike cash, stocks will fluctuate in value and may lose principal.
Returns represent past performance and do not guarantee future results. Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. Each Fund’s prospectus contains this and other information about the Funds and is available, along with information on other Gabelli Funds, by calling 800-422-3554, online at www.gabelli. com or from your financial advisor. The prospectus should be read carefully before investing.