Now is the time for investors to make the shift to U.S. equities even though many people remain hesitant about jumping into that asset class, say Fidelity Investment Canada ULC portfolio managers.
Fidelity managers spoke Wednesday at a round table discussion in Toronto.
Whereas last year, people were worried about the housing market, unemployment and political gridlock in Washington, said Jim Morrow, the Boston-based portfolio manager of Fidelity U.S. Dividend Fund, many of those issues, while unresolved, have improved. As a result, Morrow said: “markets are sort of grinding higher.”
Another signal that it’s time to move back towards equities is the P/E ratio of the S&P 500. Recently, the index hit 1,500 for the third time. The first time was in 1999 and it was at 26 times earnings, said Morrow, and in 2006 the S&P 500 hit the mark again and was at 18 times earnings. The index is now sitting at about 13 times earnings.
What is interesting for Morrow is that no one seems willing to buy despite this sign that the market has gotten cheaper. “It’s like your cup of coffee went from $3 to a $1 and nobody cares,” he said.
Two reasons why people aren’t rushing back into equities are traditional views of the asset class, and demographics.
People still connect equities with risk, said Morrow, even though it’s becoming harder to find safety in bonds. “That idea is very engrained in people’s heads right now,” he said, “and until they start to associate bonds with risk, which they haven’t had to do in a long time, I think [the move to equities] will be a very slow process.”
As for demographics, the recent market downturn may have been really off-putting for Generation Y investors (born between 1980 and 1995).
Younger people who maybe started to invest in 2007 would have been hit badly by the market collapse, said Morrow.
As a result, these younger investors may be skeptical for sometime about investing, particularly when it comes to equity markets.
However, Morrow expects Gen Y investors to slowly enter the market once employment in the U.S. picks up and they start to establish their own households.