It almost seems impossible that, at a time when stocks are setting record highs on almost a daily basis, that they could also be considered cheap. And yet, new research by the Federal Reserve Bank of New York entitled Are Stocks Cheap?, is not only arguing that point, but also contends that we'll see "historically high excess returns for the S&P 500 for the next five years."
"I clearly do believe it," says hedge fund manager Simon Baker, founder of Baker Ave Asset Management, in the attached video. "We're hitting new highs but we've basically just recovered where we were over the last 10 years."
Specifically, the analysis shows equity risk premium, or the excess return that investors expect to get from stocks versus a risk-free asset, has never been lower. Of course, part of this calculation is based upon the fact that interest rates are historically low, but Baker says there's more to it than that.
"Clearly the Fed's motive is to put money back into equities. 401(k)s will be higher, people will feel like they've got more assets and will be spending more money," he says. "I think it's interesting that the Fed is coming out and actually using some propaganda to try and get money into stocks."
To be fair, the report does carry a disclaimer noting that the analysis is the work of the researchers and "does not necessarily reflect the position" of the New York Fed or the Federal Reserve system.
Even so, Baker says these findings simply add to an ever-growing body evidence that points to the same conclusion.
"If you look at the alternatives, equities are looking more and more attractive and this is just another data point towards it," he says, noting recent improvements in retail, housing, and global central bank policy.
"U.S. equities are looking very, very strong and we're starting to see data supporting that," he says.