"Don't fight the Fed"
That's the message from the market in the wake of Thursday's blockbuster announcement of open-ended QE from the central bank.
After surging Thursday, major averages were rallying further Friday. In recent trading, the Dow (DJI) was up 0.5%, pushing further into multi-year-high territory.
"The Fed has got the pedal to the metal" and the market has "more gains ahead of it," says David Sowerby, a portfolio manager at Loomis Sayles, which has about $170 billion of assets under management.
Over the next three years, Sowerby predicts the S&P 500 (GSPC) can rise another 8% to 9% on an annualized basis thanks to the Fed's ultra-easy policies -- but also underlying fundamentals.
Yes, Sowerby worries the Fed may have overdone it and about the fiscal cliff as well. But "the backdrop remains good for investors," he says, based on the bottoms-up view of the market. "Near-term what's driving investment performance is good, solid company fundamentals."
For example, he notes S&P 500 companies are generating return on equity of about 16% while selling at a P/E ratio of around 14, less than the market's long-term average. Compared with a sub-2% yield on U.S. Treasuries and "stocks remain the preferred asset class of choice," he says.
As discussed in the accompanying video, Sowerby's specific recommendations include: big-caps Target (TGT), Google (GOOG) and Fifth Third Bancorp (FITB), as well as Kirby Corp. (KEX) a mid-cap marine transportation firm.
Sowerby says Kirby is poised to benefit from industry consolidation and increased pricing power and says the recent drought that has curtailed barge activity on the Mississippi won't have long-lasting effects.
At this time, Loomis Sayles is long the aforementioned stocks.
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