For years “don’t fight the tape” has stood as an important rule for investors. Now you can add another – “don’t fight the Fed,” says David Sowerby, a portfolio manager at Loomis Sayles.
That axiom spells good times ahead for stocks ahead, he tells Yahoo.
The Fed announced a new quantitative easing program (QE3) Thursday that was stronger than many economists forecast, including $40 billion of monthly mortgage securities purchases.
Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.
“The Fed has its pedal to the metal,” Sowerby says.
As a result, he sees annualized gains of 8 to 9 percent for the Standard & Poor’s 500 Index over the next three years.
“Compare that to less than 2 percent yields in a majority of the bond market, and stocks remain the asset class of choice,” Sowerby says.
Fundamentals are strong too. Companies are generating return on equity of about 16 percent, and are selling at about 14 times earnings, slightly below the 80-year median, he says.
“Add in dividend growth, and the backdrop remains good for investors.”
Sowerby is concerned the Fed may go too far and drive up inflation, but not in the next two years.
James Paulsen, chief investment strategist at Wells Capital Management, agrees with Sowerby on the fundamentals.
"Though the Fed has created a little short-term excitement, I think this is more fundamental than people appreciate,” he tells Bloomberg. “When the dust settles, you’re going to be left with an economy showing increasing momentum.”
Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.
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