Contrarian guru David Dreman says that, while he sees a couple of big economic risks for the US right now, he’s still bullish on the stock market. Why? Because there just aren’t other attractive options.
In his latest Forbes column, Dreman says that the lack of wage growth for the middle and working classes and misguided Federal Reserve policies are big concerns. But there’s nowhere else to turn for decent returns, he says. “The chance of a 5% to 10% return on equity investments sure beats 3% on 30-year Treasurys,” he writes. “Remember that inflation is the enemy of long bond holders. A 1% rise in rates results in an 18% drop in principal on a 30-year bond. By contrast, inflation has always been a major supporter of stocks over time. Since 1945, for example, the dollar has lost 92% of its purchasing power. The Dow Jones industrial average, by comparison, is up 93 times from the beginning of 1946.”
Dreman says he thinks the best way to invest given lofty market valuations is to buy bank stocks. “Financial institutions are now finally emerging into a new, far more positive world,” he writes. “Most have adjusted to the new heavily regulated environment, and loan demand is rising. Higher interest rates should increase spread income over time. Importantly, American banks have some of the lowest loan-to-capital ratios in the world. This combination should result in both higher dividends and appreciation over the next few years.”