Stocks
After a case of the doldrums, the election appears to have triggered a “hope” rally in stocks. These often continue for a period of months. Institutional investors have built up high liquidity reserves due to their bearishness, a solid positive.
Valuation methods like Schiller’s CAPE*, Tobin’s Q* and Market-to-GDP* are all extended and large stocks usually underperform over the next five years. Retail investors have aggressively moved into index funds leaving the market vulnerable to shifting sentiment. The Federal Reserve will likely hike short-term rates, historically a dampener for stocks.
Compared to large stocks, we believe smaller ones offer better bargains. Smaller stocks have lagged for years and are finally showing signs of strength, which could prove long-lived.
Bargain stocks suffered in much of 2016. This condition has historically been temporary and we expect a return to normal in the months ahead. This would favor stocks with relative value, solid earnings and excellent price strength.
Overall risk levels are moderate. We will see some added volatility as the market continues its transition but active management should add value.
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Positives |
Negatives |
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Excessive institutional bearishness |
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Post-election year |
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Smaller cap stocks rebounding |
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High valuations |
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Market moving out of doldrums |
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Excessive indexing |
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Improving economy |
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Federal rate hikes |
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The views and opinions expressed are those of James Investment Research, Inc.
This information is of a general nature and does not constitute financial advice. It does not take into account your individual financial situation, objectives or needs, and should not be relied upon as a substitute for financial or other professional advice to assess, among other things, whether any such information is appropriate for you and/or applicable to your particular circumstances. In addition, this does not constitute an offer to sell, or the solicitation of an offer to buy, any financial product, service or program. The information contained herein is based on public information we believe to be reliable, but its accuracy is not guaranteed.
Investing involves risks, including loss of principal.
Past performance is no guarantee of future results.
The James Advantage Funds are distributed by ALPS Distributors, Inc. 1290 Broadway, Ste. 1100, Denver, CO 80203 (Member FINRA). ALPS is not affiliated with James Investment Research, Inc.
*Shiller’s CAPE – (cyclically adjusted PE) is a valuation measure, generally applied to broad equity indices, that uses real per-share earnings over a 10-year period. *Tobin’s Q Ratio – the Q ratio is calculated as the market value of a company divided by the replacement value of the firm’s assets. *Market-to-GDP – the stock market capitalization to GDP ratio is a ratio used to determine whether an overall market is undervalued or overvalued.
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