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It is a global economy out there. Monetary policy in the developed world is very loose. Borrowing costs are low. Savings account yields are low. Inflation is low. Such a low rate environment plays an important role in the global recovery. The low yield on savings, certificate of deposit and money market accounts, all but ensure a near-zero return on investment. Short-term bond investors, especially those holding US Treasuries, don’t fare a whole lot better. As a result, the only place in town to make some money is the stock market. Consequently, investors in search of capital appreciation and yield are forced into the stock market. This is good. As more investors enter the stock market, the demand for stocks goes up, causing the market to rise. Even many well-established blue chip companies continue to offer dividend yields superior to many 5 and 10 year bond yields.

Like investors, consumers can also benefit from a low rate environment. Those looking to purchase a new car or house can borrow money at records low rates. Consumers who hold adjustable-rate mortgages (ARMs), should experience some relief from the risk of drastically higher rate-resets. The benign inflation outlook should also help consumers protect their paychecks from rising prices.

Meanwhile the risk of a European sovereign default outside of Greece has been overstated, according to Credit Suisse analysts. No political party is advocating leaving the euro. In the meantime, last quarter’s euro weakness should add nearly 1% to European GDP growth. If Europe or the US is forced into additional quantitative easing, this would drive up risk assets (stocks) and push down interest rates across the yield curve, making it even cheaper to borrow money. Even after a 60%+ rise off the market bottom of 2009, the majority of the population remains in a state of fear. For this reason, international central banks will continue to press for global recovery by pushing safety investors out of near zero-yield investments and into stocks.

If the S&P 500 brings in a total of $89 in earnings for 2011 (a discount from the $95 2011 earnings target some analysts had given earlier this year) and the market trades at 13x earnings, next year’s low on the S&P 500 may only be 1157, which represents 7.33% upside as of this writing. That’s the low-end estimate. On the high-end, we may trade at a 16x multiple, which on $89 of earnings, represents over 30% upside by the end of 2011. Not bad.

Bottomline: Don’t fight the Fed. In the US and abroad, central banks are trying to stimulate a global recovery. Many high-quality companies are now trading at very inexpensive multiples relative to historic norms. Valuations are looking attractive. Rates are at record lows. It looks like this bull market still has the legs to provide investors with solid returns from current levels.

 Contact Us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0091

*Fee paid to Goldline Research for administrative costs
**Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Briefing.com, Standard & Poors