The big news of the last week was that Spain’s banks got a bailout from the European Union. You may recall that the Fed bailed out the large U.S. banks in 2008. Many people were critical of that move. Europe on the other hand has not done large scale bailouts for a whole variety of reasons. As a result, we have seen several smaller, piecemeal bailouts which have been ineffective and are generally perceived as “kicking the can down the road”. This latest bailout is no exception.
On a positive note, all of this uncertainty is creating opportunity. The U.S. exports less than 2 percent of GDP to Europe. Some sectors have almost no exposure to Europe (e.g. restaurants). In just the last week, we have bought two stocks that have limited exposure to Europe but are trading at discounts since all stocks are weighed down by general investor sentiment.
If you think about it, 10 years ago, you could buy govt bonds with yields of 6-7 percent or stocks with an average dividend yield (on the S&P) of less than 2. Now those same bonds are yielding less than 2, and high quality stocks with rock solid balance sheets, consistent revenue and earnings growth are sporting dividend yields of 3-4 percent. Given today’s valuations, expecting investment returns over the next decade to be similar to the last decade would be foolish.
