Even though U.S. stocks are in the sixth year of a bull market, and the Standard & Poor’s 500 stock index is tickling its record highs, Oakmark Funds portfolio manager Bill Nygren says he’s not worried about equities being too elevated.
Memories of the 2008 market’s swoon caused by the global financial crisis still has some people scared, but he said stock market drops like that happen only once every 50 or 60 years. But he did have a word of caution for more skittish investors.
“If you think a Great Recession like we had seven years ago will happen every decade, then you don’t want to own stocks at this level,” said Nygren, who spoke Thursday at the Morningstar Investment Conference in Chicago.
He said large, quality companies remain attractive and are not overly priced at current levels as valuations are tight. Few stocks trade with price-to-earnings ratios either in the single digits or more than 25, he said.
“[For] high-quality companies with long tailwinds, the market is not asking for too much of a premium,” he said.
Steven Romick, co-managing partner of First Pacific Advisors, agreed with Nygren––up to a point.
“Low rates have perverted capital allocation,” he said. “Everything is more affordable at low rates. Right now things are not expensive. If rates go up, and we are at generally low interest rates, then it’s a different story.”
When interest rates rise, Romick said he would avoid highly leveraged companies.
Both Nygren and Romick like bank stocks, and think investors are unfairly punishing them. Part of that view stems from investors getting burned by holding bank stocks during the Great Recession, but also because there’s a fear that new regulations put on banks regarding capital requirements may cause unintended consequences.
“One fear is that the industry will be so heavily regulated that banks will turn into the electric utilities,” Nygren said. He noted banks tend to trade at book value per share of 80 to 90, while utilities trade closer to 150.