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Our Outlook for the Stock Market

A rising market leaves fewer opportunities, but stocks are still the place to be over the long run.

Matthew Coffina, CFA, 12/27/2013

--Despite the ongoing bull market, stocks continue to look approximately fairly valued. The median stock in Morningstar's coverage universe is trading at a 2% premium to our fair value estimate. While price/earnings multiples are above 100-year averages, they are generally consistent with levels of the past 25 years.

--Investors may be tempted to take profits, hoping to buy back in at better prices down the road. However, trying to time the market in this way is enormously challenging. Companies will continue to collect cash flows, grow their earnings, and raise their dividends over time--intrinsic value is a moving target.

--Signs of an improving economy and fears of rising interest rates have caused conservative stocks to fall out of favor, which is a reversal from the first few months of the year. However, we're finding some of the most compelling opportunities in more conservative corners of the market, where certain stocks offer attractive total returns and below-average risk.


Not a Time to Time the Market
American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.

--Warren Buffett

The quote above is taken from Berkshire Hathaway's BRK.B most recent annual letter, and as usual Buffett's wisdom shines through.

Matthew Coffina is a stock analyst at Morningstar.

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