10/22/2012 7:15 PM ET|
US stocks again top all other assets
For the first time since 1995, shares of US companies are outperforming Treasurys, commodities, corporate bonds and all other asset classes.
U.S. stocks are beating every other major asset class for the first time in 17 years, even as economic growth weakens and profits rise at the slowest rate since 2009.
The Standard & Poor’s 500 Index ($INX) has rallied 14% in 2012, beating Treasurys, corporate bonds, commodities, the dollar and equities in Asia and Europe, data compiled by Bloomberg show. The last time that happened, in 1995, the S&P 500 was posting its biggest annual advance of the last five decades. With a price-to-earnings ratio close to today’s level, the index gained an additional 93% in the next 2 1/2 years.
For all the concerns about unemployment and manufacturing, in the wake of unprecedented steps by the Federal Reserve to support growth. the best assets this year remain U.S. companies. Forecasts for a rebound in the U.S. economy and the central bank’s pledge to keep interest rates near zero for years have convinced bulls that the S&P 500 will extend gains. Bears say political gridlock will drag down prices once the Fed's monetary stimulus wears off.
“We see good earnings growth and improving economic outlook, we see good equity valuations and easy monetary policy, we see skeptical investors and low positioning in equity assets,” said Max King, a multi-asset strategist at Investec Asset Management in London. “This is a major green light for equities and the fact that people don’t see it, is great.”
Treasurys have returned 3.3% in 2012, compared with 9.9% for U.S. investment-grade corporate bonds and 14% for high-yield debt, based on Barclays index data. The S&P GSCI Index ($SPGSCI)of 24 commodities advanced 1.7%, while the Dollar Index (find DXY on Bing) that measures the U.S. currency against those of six trading partners weakened 0.7%.
The S&P 500 gained 0.3% last week to close at 1,433 following better-than-estimated data on U.S. housing starts and as earnings from Citigroup (C), Honeywell International (HON) and Mattel (MAT) topped forecasts. When dividends are included, the index is up 16% this year, led by Pulte Group (PHM), Sprint Nextel (S) and Gap (GPS), which have risen more than 96%.
The bull market will last a year longer as individuals regain confidence and return to equities after withdrawing from the market since 2007, according to Laszlo Birinyi, the president of Birinyi Associates in Westport, Conn.
“I don’t think you’ve seen the signs of a frothy, toppy market,” Birinyi said in an Oct. 17 phone interview. “People are realizing that the stock market is not all that bad. It’s been telling us that the economy and companies are in better shape than people think.”
Shares worldwide rallied this year as European Central Bank President Mario Draghi said July 26 the bank would step up its fight to save the euro and bring down record borrowing costs in Spain and Italy.
In the U.S., the Fed initiated a third phase of so-called quantitative easing on Sept. 13 to purchase $40 billion of mortgage-backed securities per month and said that it will keep interest rates near record lows at least through mid-2015.
The U.S. recovery is the weakest post-recession expansion since World War II, according to Bloomberg data, and the International Monetary Fund forecasts gross domestic product around the world will expand 3.3% this year, the slowest since the 2009 recession.
While the S&P 500 is outperforming broader indexes, nine national markets among 24 developed nations tracked by Bloomberg have gained more. Germany’s DAX Index has jumped 25% as investors raised expectations policymakers will solve Europe’s debt crisis. The Athens Stock Exchange General Index soared 28% on optimism Greece will reach a deal with the IMF and European partners to remain in the eurozone. Silver, corn and platinum have risen at least 15%.
Bears say the support of central banks can only do so much. They also note that the so-called fiscal cliff, the more than $600 billion of tax increases and spending cuts that are set to kick in automatically next year unless Congress breaks a deadlock, is weighing on investors deciding which assets to buy.
“I’d rather have things be moving up as a result of fundamentals than a very aggressive central bank,” Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, N.M., said in an Oct. 18 phone interview. “You’re looking at a bunch of companies in situations where there are a lot of headwinds and a real difficulty of getting growth.”
General Electric (GE), the biggest maker of power-generation equipment, has fallen since reporting revenue last week that missed analyst estimates and cut its 2012 sales target. It was the second quarter in a row of lower-than-projected sales, data compiled by Bloomberg show.
While the unemployment rate unexpectedly declined to 7.8% in September, payroll growth slowed, a Labor Department report showed on Oct. 5. Companies added 114,000 workers last month after a revised 142,000 gain in August, according to government data.
Reports on the world’s largest economy beat forecasts last month. U.S. manufacturing unexpectedly expanded in September after three months of contraction, while service industries grew by the most in six months, data from the Institute for Supply Management showed this month.
“The negative case is always more compelling,” Birinyi said. “It’s always more rational because the negative case is about now. The stock market is about tomorrow.”
S&P 500 earnings may rise 4.7% this year to $101 per share, the highest on record, according to the average prediction among Wall Street equity strategists. While the growth rate is about a third of the pace in 2011 and the slowest since 2009, profits have already expanded an average 23% a quarter since the start of 2010. They’re projected to pick up in 2013, increasing 5.7%, the data show.
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Wall Street strategists tracked by Bloomberg predict the S&P 500 may surpass its all-time high next year. The benchmark could end 2013 at 1,585, according to the median forecast of five analysts polled by Bloomberg News, which would 1.3% higher than its October 2007 top.
The improvement in the U.S. economy and signs Europe’s debt crisis may be easing made Treasurys less attractive than equities this year. The yield on the benchmark 10-year bond fell to 1.38% on July 25, according to Bloomberg data, a record low. It finished last week at 1.76%, from 1.88% at the end of 2011.
The Barclays 10-20 Year Treasury Total Return Index has climbed 3.3% this year. The Barclays Municipal Bond Index has advanced 6.1%, while a gauge of Treasury inflation- indexed notes known as TIPS has added 6.3%.
Debt issued by companies, loans and hedge funds also trailed stocks. A Barclays index of investment-grade U.S. corporate debt has gained 9.9% in 2012 and a gauge of high-yield credit has advanced almost 14%, as of Oct. 19. The S&P Leveraged Loan 100 Total Return Index is up 9.7% this year, while the HFRI Hedge Fund-Weighted Composite Index added 4.8%.
The S&P GSCI commodity index is poised for its smallest annual advance since plunging in 2008. China's economy expanded 7.4% last quarter, the lowest pace in more than three years, the government said Oct. 18. A slowdown in the world’s second-biggest economy and largest consumer of raw materials is putting pressure on the ruling Communist Party to add stimulus, fueling confidence the country will avoid a hard landing and boost world economic growth.
The MSCI Emerging Markets Index, which tracks stocks in 21 developing nations including China, Brazil and Russia, has climbed 9.8%, and the Euro Stoxx 50 Index for the 17-nation eurozone is up 9.7%.
The 34% rally for the S&P 500 in 1995 was its biggest gain in 37 years. The U.S. equity benchmark traded at an average 16.6 times reported earnings and rose more than 19% annually through 1999 as economic growth boosted profits and investors snapped up new-technology businesses. The index ended last week with a price-earnings multiple of 14.5, data compiled by Bloomberg show.
Equities remain cheap compared with other assets, according to Alan Higgins, who helps oversee $48 billion for Coutts & Co.
Profits for S&P 500 companies represent 6.9% of the index’s price, compared with a yield of 2.7% on investment-grade U.S. corporate bonds, according to Bloomberg and Barclays data. The spread of 4.2 percentage points compares with an all-time high of 4.6 points in 2011, the data show.
“Equities still stand out either as attractive or reasonably valued, so we are more likely to invest there,” Higgins, the London-based securities firm’s chief investment officer for the U.K., said in a phone interview on Oct. 18. He cut investments in credit last week. “They are more likely to take the lead based on current valuations.”
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