LOS ANGELES, Nov. 21, 2014 /PRNewswire/ -- As equity investors approach the holiday season and give thanks for another good year, one wealth management firm projects that significantly more good news is on the way.
"This year's double digit gains of the S+P 500 – dwarfing the returns of foreign markets – should continue just as strong through the next year," says Selwyn Gerber, CPA RIA and co-founder of Los Angeles-based wealth advisors RVW Investing LLC .
"What we are seeing is a radical re-pricing of equities to reflect the new reality of low interest rates and low inflation," he adds.
Mr. Gerber cites three important signs that the bull market will remain in force through 2015:
- Fed Chair Janet Yellen continues to signal that – at least for a while longer – the current low interest rate environment will remain.
- The bond market is telling us that it does not expect inflation: With the 10 Year Treasury yielding 2.3% and the 10 Year Treasury Inflation Protected Bonds yielding only one-half percent (.5%), we can determine that inflationary expectations over the next 10 years do not exceed 1.8%.
- The forward-looking earnings yield on the S+P 500 is currently 6.25% – almost three times the 10 Year Treasury Rate – making it one of the largest spreads in recent history. For that ratio to resume its typical relationship of parity, either interest rates will soar, earnings will plunge or stock prices will go up.
"Of these three outcomes," says Gerber, "our vote is assuredly for the latter."
"We call the current situation a 'Goldilocks economy,'" says RVW co-founder Michael Stone CPA RIA, "meaning that we have a 'just right' balance of critical indicators:
- Corporate profits are strong and growing;
- The energy renaissance is already emerging as the next game-changer for the U.S. economy;
- Interest rates have remained at historic lows for a long time; and
- The Fed has given us an accommodative monetary policy."
"The naysayers have got this one wrong because they are looking at the wrong metrics," says Gerber.
"Traditional analyses have successfully predicted the end of previous bull markets – most notably the Cyclically Adjusted Price-Earnings ('CAPE') ratio developed by Nobel Prize winning economist Robert Shiller," he adds.
"However useful this approach may have been historically, it does not account for the critical new variable of our current environment: long-term low interest rates."
"Stay buckled in," advises Stone. "The ride will be bumpy, but the path will assuredly trend strongly upwards."
SOURCE RVW Investing LLC