Yardeni: US Stocks In A Secular Bull Market; More Room To Run For China

March 24, 2015

Ed Yardeni is president and founder of Yardeni Research, a global investment research strategy firm. A former economist for the Federal Reserve Bank of New York, he is widely followed by institutional investors for his investment strategy publications. Dr. Yardeni is often seen on CNBC and is published in financial publications like the Wall Street Journal, The New York Times and Barron's.

Dr. Yardeni recently sat down with ETF.com to discuss his views on the U.S. economy and particular sectors within it. He shares his expectations for Federal Reserve policy and how it may affect financial markets. He talks about China's stimulative economic policies and why he is especially bullish on the off-shore Chinese stock market.

ETF.com: You have frequently talked about the phases of the business cycle, going from pessimism, to skepticism, to optimism, to euphoria. Recently you were quoted as saying we now have a problem with corporate earnings. So where are we in the business cycle?
Ed Yardeni: In terms of the business cycle, where the economy is, we're well into the expansion phase. Real GDP now exceeds its previous peak. What is unusual is that, this far into the business expansion, inflation remains extraordinarily low and interest rates remain extraordinarily low. The conclusion is that this business cycle expansion is likely to last much longer than average, in which case we're probably looking at a secular bull market for stocks; in other words, one that can last for a few more years.

ETF.com: Do you think the recent strength in the dollar could potentially derail something like that?
Yardeni: I don't think that. The next bear market is going to be caused by the next recession. The soaring dollar is not going to cause a recession. But it certainly is a challenge for earnings growth. Roughly half of S&P 500 revenues and earnings come from abroad. And with the dollar up almost 20 percent, that's a 10 percent haircut to corporate earnings. So that in turn could lead to some slowdown in hiring and capital spending, but not enough to cause a recession, in my opinion.

ETF.com: Do you think the prospect of the Fed raising the rates would rattle markets despite the relatively positive fundamentals of the U.S. economy?
Yardeni: I think it has been rattling markets, although we are near all-time record highs, which were achieved just a few weeks ago. So the market's actually holding up pretty well in the face of widespread expectations that the Fed will raise interest rates. But the Fed's only going to do it because the economy's performing well. And that in turn is positive for stocks, not negative.

But the main problem in the market is valuation. Nothing's cheap. There's not very much left that's cheap; it's all been picked over. P/E's are historically high. Some sideways action is warranted, and that's been demonstrated of late with the up-and-down volatility we've seen. And that might last a while, maybe through the summer. The market needs some time to get comfortable with normalization by the Fed. And time is necessary to let earnings catch up with rather inflated valuations.


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