Tags: Johnson | investors | returns | Fed

Robert Johnson: Investors Should 'Psychologically Prepare for Lower Equity Returns'

By    |   Tuesday, 07 April 2015 07:40 AM

With the Federal Reserve currently expecting to raise interest rates later this year, what's an investor to do?

Robert Johnson, CEO of The American College of Financial Services, has a few ideas.

"Given that in the future rates can do nothing but go up, my advice is for investors to psychologically prepare themselves for lower equity returns over the near future and most likely for years to come," he tells MarketWatch columnist Robert Powell.

Many economists expect the Fed to begin raising rates in September.

"Given that by most traditional valuation metrics (P/E ratio, dividend yield and the like) the stock market is richly valued in comparison with historical norms, any significant change in monetary policy to a more restrictive stance would seem to represent a perfect storm for a stock market correction," Johnson says.

The S&P 500's trailing price-earnings ratio stood at 20.25 Friday, up from 17.69 a year ago, according to Birinyi Associates.

"A more conservative asset allocation may be warranted once a restrictive monetary stance is initiated," Johnson suggests.

"Fed policy has a tremendous influence on investment returns and investors ignore Fed policy at their own peril."

Focusing on the near term, with the stock market flirting near record highs while analysts forecast a slide in earnings, equities are skating on thin ice, experts say.

"There is not a lot of room for error," Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking, tells The Wall Street Journal. "I am cautious."

The S&P 500 index stands less than 2 percent below its all-time peak.

That has pushed Robert Shiller's cyclically adjusted price-earnings (CAPE) ratio, which includes 10 years of earnings, to 27.4. That level was topped only in 1929, 2000 and 2007, periods preceding a market crash.

Analysts predict a 4.6 percent drop in S&P 500 profits for the first quarter, following a 3.7 percent increase in the fourth quarter, according to FactSet.

Signs of economic sluggishness aren't helping the stock market. Non-farm payrolls grew by only 126,000 jobs in March. And retail sales dropped 0.6 percent in February, the third straight monthly decline.

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With the Federal Reserve currently expecting to raise interest rates later this year, what's an investor to do?
Johnson, investors, returns, Fed
351
2015-40-07
Tuesday, 07 April 2015 07:40 AM
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