The stock market has been in a downtrend for weeks, and more turbulence may be ahead, but according to Loomis Sayles portfolio manager David Sowerby, the upcoming months are generally looking brighter.
Sowerby, who has been with his current firm since 1998 and who has 25 years of experience in the investment field, tells Matt Nesto in the accompanying video that he's calling for a rally of as much as 12% to 14% for the market in the near term.
The first positive for stocks regards valuations, he says.
"Stock prices are trading at 11 times earnings, which are very, very close to the lows of 2009 in the spring of that year," he says.
Besides favorable price-to-earnings ratios, another reason for optimism surrounds the free-cash flow yields of between 5% and 6% that are regularly being seen, and "that compares very favorably to a low 2% yield on a 10-year U.S. Treasury."
Additionally, despite the macro-level slowdown, corporate America's earnings, cash flow and revenue growth continues to exceed expectations, Sowerby says.
So while he knows managers at some, if not many, companies are at least somewhat cautious, the situation could be setting up for "a meaningful stock rally" between now and the end of the year and perhaps into early 2012.
Investors can be forgiven if they have doubts about the market and the economy and whether stocks are poised to set off on a noticeable climb. Sowerby acknowledges as much, but he is confident that when asset classes are compared, stocks will be viewed as the best bet.
"Demand is skeptical at the retail level because the typical retail customer has been through the perils of '08-'09," he says. "They're looking at the summer of 2011 and saying ,'here we go again, and just how much more can I take of this."
However, he believes if individual investors step back and look at the low yields in bonds and a possible bubble in metals like gold, they'll take the view that equities are the better investment for the longer term, giving the market a boost.
Sowerby also expects the economy to avoid a recession, saying that the data set for the third and fourth quarters of the year will show improvements are under way. At the same time, he says companies will be boosting dividends, buying back stock and spending on capital improvements, which will help employment.
"And that I think will be the modified catalyst, coupled with valuations, that can move stock prices higher between now and year end," he says.
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