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 That, at least, is how some of America's largest money managers
interpreted her comments on Wednesday suggesting interest rates will
remain low through 2016.
It reinforced their views that easy money means the U.S. stock
market rally has further to run despite notching a series of record
highs already this year. That could easily put the S&P 500 benchmark
on track to surpass 2000 for the first time, and to do so well
before the end of the year.
Such a gain for 2014, after a 30 percent rise in 2013, would
surprise those who worried that stocks might be getting overvalued
and were due for a sizable pullback.
One reason for increasing confidence is that the resilience of the
market has been very strong in the face of various shocks this year.
A combination of an improving economy, rising earnings, and the
cheap borrowing costs, has made that possible.
Stock investors have shaken off last year's budget uncertainty in
Washington, a sharp drop in high-growth technology companies and
biotech shares, the conflict in Ukraine, and more recently the
apparent tearing apart of Iraq that resulted in a spike in oil
prices.
"What I have is a sweet combination of a self-sustaining, long
lasting economic expansion joined with a long-lasting monetary
accommodation," said Steven Einhorn, vice chairman of Leon
Cooperman's hedge fund Omega Advisors Inc, which has $10.5 billion
in assets under management.
"I don't think this bull market is over," he said, adding he
estimates stocks could rise another 3 to 5 percent this year.
That may sound modest but when added to an average S&P 500 dividend
yield of 2 percent, it looks pretty attractive against the 2.62
percent yield of a 10-year Treasury note.
FUND FLOWS
Yellen on Wednesday said interest rates could stay "well below
longer-run normal values at the end of 2016," leading to further
gains in stock prices that on Thursday pushed the S&P 500 to a new
record. The S&P 500 gained 2.50 points or 0.13 percent, to close at
1,959.48.
While the Fed lowered some of its economic forecasts, Yellen
nonetheless cited reasons for optimism about the world's biggest
economy, including resilient household spending and an improving
jobs market.
Even if the market closed the year at this level it would mark the
best three-year run for U.S. stocks since the 1997-1999 period.
That's driven greater household interest in equities. Retail
investors have dropped $61 billion into U.S.-based stock funds this
year, according to Lipper.
Tom Nally, a president at TD Ameritrade Institutional, told the
Reuters Global Wealth Management Summit on Wednesday that retail
clients have an average of 19 percent of their assets in cash,
slightly below the historical average of 20 to 25 percent. Advisers
working with the firm are even more bullish - with 8 percent of
their clients' assets in cash.
"We still think we are in one of the biggest bull markets of our
careers," said Rich Bernstein, founder of Richard Bernstein Advisors
LLC in New York, and a former top Merrill Lynch investment
strategist.
BEYOND A BAD WINTER
While first-quarter growth disappointed, economists say the effects
of unusually bad winter weather will fade later this year.
Expectations for corporate earnings growth have improved, with 2014
earnings expected to grow at 9.1 percent, up from 8.7 percent on
April 1, according to Thomson Reuters data.
Several fund managers said the slowness of the economic expansion
may work in favor of the slow grind higher in stocks. The languid
pace has prevented over-enthusiastic expectations from investors and
the buildup of fixed-cost investments that "sow the seeds for the
next recession," Bernstein said.
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"It is simply too early in this business expansion for shares to
peak," said Einhorn. "If I'm correct that this particular economic
expansion has years to go, then this bull market should have a good
deal of time and price left in it."
What's been striking about the rally is, in a sense, just how boring
it has become. The S&P 500 hasn't closed up or down by more than 1
percent in 43 consecutive trading days, the longest streak since
1995, said Antony Filippo, a Toronto-based independent investment
manager.
The CBOE Volatility index closed at its lowest in more than seven
years on Wednesday. To some, this suggests investors have become
"complacent," that is, ignoring potential problems that could derail
a rally, but a number of strategists suggested that just because
investors aren't paying for protection does not mean they don't have
worries.
"You always want to be on guard for excesses ... but as it stands
now the bias does appear to be toward the upside," said Dan
Greenhaus, chief strategist at BTIG, who sees the S&P 500 at 1980 by
year-end.
SOME RISKS
The year's strongest performers are a mix of defensive stocks with
high dividends, like utilities - which have risen 14 percent - and
growth areas like health care, technology and energy. The consumer
discretionary sector - which includes many retailers - is the only
one that is in the red this year, suggesting concern about the path
of spending.
If inflation picks up as growth remains stagnant, that would give
investors pause. Core U.S. consumer prices have risen 2 percent over
the last year, and if the inflation rate went much higher it could
put pressure on the Fed to consider moving more rapidly to raise
rates.
"If the Fed had to get more hawkish quickly it's going to be a
problem for the market, and lead to an abrupt end of low volatility
- we are vulnerable to a shock," said Russ Koesterich, chief
investment strategist for Blackrock, which has more than $4 trillion
in assets under management.
Some measures suggest stocks are a little expensive: The current
forward price to earnings ratio, at 15.6, is higher than the 10-year
average of 13.8, according to Thomson Reuters data.
Stocks could peter out when the Fed finally begins raising interest
rates and the excess fueling equities' gains is gone.
"When the Fed starts shifting toward maybe hiking rates, then you
say, 'Okay, do I have to rethink how I'm allocated here?'" Greenhaus
said.
But many investors see plenty of time to take the bullish road
before having to worry about that.
"What's there to not like?" asked Karyn Cavanaugh, senior market
strategist at Voya Investment Management in New York, which has $215
billion in assets under management.
Cavanaugh, who sees the S&P ending the year around 2020, added:
"There's nothing out there that's really going to derail this
market."
(Reporting by Luciana Lopez, David Gaffen and Jennifer Ablan;
Additional reporting by David Randall; Edited by Martin Howell)
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