Undervalued S&P 500 just one of the reasons good times are here to stay, according to chief economist
Investors have been urged to put their political leanings to one side and recognize that the S&P 500 is not only undervalued but poised to climb much higher.
Brian Wesbury, chief economist at First Trust Portfolios, believes many people have allowed politics to dominate their minds and even cloud some investment decisions.
He said that, often, if their side is in power, they’re bullish but if they’re not, they’re bearish. However, despite a significant change in power in the U.S., the market has continued to go up, going against what many Conservatives predicted.
Wesbury warned that investing through a political lens is the wrong way to look at the market and the wrong way to invest.
So why is the market up? First of all, it’s undervalued, according to Wesbury. By using a capitalized profits model he believes the S&P 500, fair value, is worth 5,100 compared to its current value of around 3,800.
Wesbury said: “When you go into an election, [a scenario] where people think markets could be affected, we're undervalued, so no wonder we're up, especially when you think about the Federal Reserve’s money supply is up 25%. In the past year, interest rates, short rates, are at zero, and the Federal Reserve is like a tide lifting all boats.”
The second boost for markets is that, under a Joe Biden administration, the U.S. will get a much bigger stimulus Bill, announced yesterday as a $1.9 trilion package. Therefore, spending will go up as will the money supply.
On top of this, the chief economist believes the way we have learnt to use technology – and the acceleration of take-up by business – will reduce costs, increase productivity, and increase profits.
He said: “When you put all of this together, what we see is a rising stock market, a stock market that is undervalued and one that in my opinion will continue to go up.”
The final piece of this argument, Wesbury added, is the fact tax hikes are unlikely given unemployment numbers and the state of the pandemic.
“It’s probably not politically good for politicians and it would slow the economy's recovery from the pandemic shutdown. We believe that any tax hike really won't go into effect until 2022 or 2023.
“When you put all of that together, the bullish move in the market is understandable, and I believe it is just the beginning.”