Equities have rallied over the past few days, finishing at historic levels Tuesday, providing optimism that plans for a better vaccine rollout will create a more efficient and safer reopening of the country. Analysts and experts are optimistic that
Biden’s pandemic program could help buoy stocks and index ETFs for the remainder of the year, despite some concern that valuations are at historic levels, potentially creating a bubble.
While some analysts see the market as overbought on a valuation bases, they note that there are reasons to still stay invested, such as interest rates and the Fed’s monetary stance.
“Look, valuations are record levels. And depending on how you look at it they can either be as high as the late 1920s or even approaching levels we saw in the dotcom bubble. And you know, there are certainly parts of the market where there does appear to be froth. Now that said you can’t look at valuations in a vacuum. You have to understand what the earnings picture is gonna look like on a forward basis, but you also have to think about the path of interest rates. And considering how low rates are, and that they are expected to stay low, when you actually look at valuations on an interest rate adjusted basis, they don’t look as stretched as a headline numbers are,” said Michael Labella of Franklin Templeton on a CNBC segment.
This extension of low interest rates, in the context of improving earnings, is favorable for valuations according to Labella.
“As the economy starts to improve and earnings start to rebound interest rates are likely to stay stable in the valuation picture isn’t likely to be worrisome,” he added.
According to Labella, one exception to this would involve a rapid jump in rates or a major disappointment with earnings, which could lead to a drop in valuations and potentially stock and index ETF prices.
Active ETFs for the Current Market Environment
So what investments make sense in this context? Investors have been favoring large cap growth stocks, according to Michael Arone of State Street Global Advisors.
“When I think of federal reserve holds interest rates at basically zero, who cares about valuations, and I think investors have largely reflected that,” said Arone on the same segment.
Along with expectations of a rebound in profit growth this year and a recovery in economic activity, other market observers argued that the foundation for further stock market gains is in place.
“Restrained inflation, low interest rates and rising earnings provide valuation support and the basis for stocks to trend higher,” Terry Sandven, chief equity strategist at U.S. Bank Wealth Management, said in a note, adding that favorable growth trends for communications stocks like Netflix, along with those in the tech, consumer discretionary, and health-care sectors, remain intact.
For investors looking at growth ETFs to get involved with the market, T. Rowe Price offers four actively managed ETF strategies, including the T. Rowe Price Blue Chip Growth ETF (TCHP), T. Rowe Price Dividend Growth ETF (TDVG), T. Rowe Price Equity Income ETF (TEQI), and T. Rowe Price Growth Stock ETF (TGRW).
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