Breakout

Don't fret, recent pullback is just a buying opportunity: Smith

Breakout

Stocks are off to a historically terrible start to 2014 but Hank Smith of Haverford thinks it’s a temporary pullback in an ongoing expansion story. In the attached clip Smith lays out the argument for using this as an opportunity for investors who’ve have been sitting on the sidelines for the last few years.

“The market has a way of disappointing the majority,” Smith explains, “We saw net inflows for the first time in six years for 2013 and look what the market presents these new buyers of equity funds.”

It’s a tough initiation to be sure. Ironically the pullback is coming a year after most people expected it. Last year at this time stocks were facing a potential nightmare of sequestration and fears of a government shutdown. Those threats loomed large until as late as November but the market still put in the best year in ages. Now the headwinds are coming from overseas where emerging markets are falling apart, possibly killing America’s already uninspiring recovery. Smith says it’s just more of the same.

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Of course now the stock market has doubled since the famous bottom of March 2009. People too concerned about getting long stocks for years are unlikely to find a great deal of value in stocks today. Smith counters those views by observing that the S&P500 (^GSPC) certainly isn’t cheap but it’s not expensive by historical measures. Trading at a PE of about 14X expected earnings for the next 12 months, stocks are reasonably priced given the low inflation levels and lack of better investing alternatives.

About the only thing that could knock his thesis off-track now is a recession. Despite recent weakness and what Smith laughingly calls “the most important jobs number ever” later this week, he doesn’t see much evidence to support the idea that the economy is on the verge of a massive breakdown.

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