John De Clue, a top stock market strategists and investment officer at U.S. Bancorp.

Kyndell Harkness, Star Tribune

Will appetite for risk return?

  • Article by: NEAL ST. ANTHONY
  • Star Tribune
  • August 11, 2012 - 9:02 PM

The Standard & Poor's 500 stock index has gained more than 11 percent in value this year through Friday and has doubled since the depths of March 2009. It just doesn't feel that way to many investors, amid day-to-day volatility driven by concerns here and abroad that have kept many individual investors on the sidelines.

John De Clue is chief investment officer of the Private Client Reserve of U.S. Bank and is involved as a strategist throughout U.S. Bank Wealth Management, which manages more than $80 billion in client assets. He was interviewed on Aug. 1.

Q Is the S&P 500 [which closed at 1,405.87 Friday] cheap or expensive lately? What are you telling clients?

A On a historic basis, the market is relative inexpensive. We haven't seen price-to-earnings ratios at this level, really, other than in a recession, since 1991. The current estimate for [aggregate] earnings of S&P 500 companies is about $105 this year. But even at $100, and applying a multiple of 15 you get a nice move upward in the S&P 500 index to 1500.

The No. 1 thing standing in the way of a rising market is investor sentiment -- the unwillingness to take risk. There's a lot of concern over developments in Europe, worries about [Iran] and the Middle East, a slowdown in China. No. 2 concern is a lowering of earnings expectations.

Q Are investors nervous, whether they are affluent or middle class, and worried about their 401(k) mutual fund retirement balances?

A There is a subtle difference. Generally speaking, the more affluent investors have been in the market for some time and they are not pleased with the last few years, but they know often opportunities present themselves when things are darkest, just before dawn . ...They are interested in preserving their wealth. But there's a bubbling of interest as they smell a bargain at these prices.

Generally more inexperienced investors look at their 401(k) stock-fund balances and the last decade [of meager returns] and may wonder, "Why would I do that anymore?"

They are [also] concerned about the value of their home ... often a big part of their net worth. They don't want to take much risk. But consumer confidence is getting a little stronger. People are aware the housing market is recovering. It's too early to say whether it will have an impact on investor confidence.

Q What can go wrong in the U.S. and the world?

A Inaction on the part of policymakers in Washington, post-election, to address significant [debt] problems in the United States. We probably don't have any choice but to wait through the U.S. election and see how Washington will address [the pending] "fiscal cliff" and long-term debt problems.

Europe, and whether those policymakers can finally address with concrete steps their fiscal issues, is almost day-to-day. It's impossible to predict a fiscal shock but it seems the world is on a collision course with Iran. It's hard to believe there would be any military action before the U.S. election. Otherwise, the world economy, we think, is in OK shape.

Q Why do you like the U.S. market long term?

A It begins with long-term attractive valuations. There also are wonderful beginnings of a recovery in housing. Contractors are hiring. Pay is up for construction workers. I just got back from a giving a talk in Denver. I was sitting with a drywall manufacturer who said he just negotiated a 20 percent pay increase with his workers to keep them from leaving. I engaged an electrician for a minor electric problem in my old home south of Lake Harriet. I asked him about business. His company was scrambling to rehire laid-off workers. He said remodeling and new construction are coming back in the Twin Cities. There are still problems in Las Vegas, Florida and elsewhere ... but if we can get strength in housing prices, it may give some confidence to that person who has wanted to start a business.

Q You're bullish on the U.S. long term?

A U.S. manufacturers are more productive than Japan, Germany and every other country in the world. We have wonderful productivity and we build value-added products, not circuit boards but CAT scanners and jet engines and so forth. And demographics. Japan, China and Europe have aging populations and insufficient population growth.

We are aging, but we have positive population growth. Europe, I believe, is negative. You need 2 percent growth just to replace us. We'll need workers [to replace retiring baby boomers]. We're producing through birthrates and immigration what we need.

Q Do you expect to see investors return to stocks?

A We think they will. But we have to get through the near-term uncertainty that is clearly undeniable, including Europe and the election year. The investors want to see continuation of a relatively positive market [this year]. People feeling relief from the value of their homes increasing transfers into a willingness to take risks ... and can help lead to nice improvements in the market.

Neal St. Anthony • 612-673-7144

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