As chief investment strategist and a longtime member of Standard & Poor’s investment policy committee, Sam Stovall, a 14-year veteran at S&P, joins the IA asset allocation panel beginning with the March 2003 issue, replacing Arnold Kaufman, who is retiring. This month, Stovall explains the reasoning behind S&P’s recommended allocation of 65% stocks, 15% bonds, and 20% cash.
Can you tell us why S&P maintains a 65% stock allocation?
Our feeling is that stocks are more likely to offer the best growth potential over the coming years. Investors are asking, “Where do I put my money?” And our thought is that there is better opportunity in stocks than anywhere else. Let’s look at cash. In a money market fund you’re getting about half of the dividend yield on the S&P 500; that is not a lot. Even though you do get the safety of FDIC insurance, it is way less than 1%. After taxes and inflation, that number becomes negative. So we really didn’t feel that cash was a great investment, certainly we have money in cash to put to work later on, but we don’t have a lot. We don’t think that it is going to be a “Cash is King” situation for quite a while.
So then is your 20% cash holding appropriate?
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We do have 20% because we feel that bonds have even less upside potential than equities. With yields being at a 40-year low, we feel that, at best, yields could drift from here. Depending if you are dealing with intermediate- or short-term bonds, that drift is anywhere from 2% to 4%. Again that is not very much, but the likelihood of losing money has been increased, especially with the stimulus package that is working its way through Congress. The projections for improving the economy, and the fact that we are at 40-year lows, means there is greater risk than reward potential. And that leaves us with stocks. You don’t want to get too aggressive with stock allocations because we are in a gyrating market with an awful lot of near-term worries; but a market that is still fairly richly valued when you look at P/Es. I guess the thought is that there aren’t many exciting alternatives to what’s out there. So you can go with what our longer-term projections are, and stocks look the best with maybe 7% to 8% returns over the next couple of years.
What are your sector expectations?