After a strong 2013 where the S&P 500 was up almost 30%, you would think that most stocks would be close to being fully priced. That’s not what Thomas Lee, the chief equity strategist at J.P. Morgan thinks. In a new research report, the J.P. Morgan team remains confident that U.S. economic momentum is strengthening, and they continue to expect incoming data over the next few months to validate that trend. They also think that investors remain positive on equities in general, but point out that retail ownership of stocks is still low.While margin debt levels are raising some eyebrows on Wall Street, the J.P. Morgan analysts are not concerned. They are focused on the quartile of stocks that are forecasting earnings growth of 11% or greater and have a median price-to-earnings (P/E) ratio of only 11.8. This compares with the broad market, which is trading at 16.5 times earnings, which is near historical highs.
The question becomes how best to leverage your mutual funds and/or ETF’s to access those undervalued stocks. This year I plan to focus more of my long-term investing strategies on picking ETF’s over stocks. I’ll continue to focus on fixed income investing through preferred shares rather than bonds.
A look at the returns in the European markets show that the FTSE was up 14.4% last year and the CAC was up 18%, while the DAX was up 25.5%. All three of these major EU indexes trailed the DJIA return of 26.5%. This may be an indication that there is more growth available in the UK, France, and potentially the EU as a whole. Certainly European funds will be an area I research in more depth (FTSE Europe ETF - VGK).
Other areas I will look to focus on include Healthcare (Vanguard – VHT) which returned north of 40% as a sector last year, and Energy (Vanguard – VDE) which lagged the markets last year. Information Technology (Vanguard – VGT) also seems to be on a uptrend while only trailing the S&P slightly on the 1yr and 3yr trend.
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