Birinyi Is Buyer as Biggest Bull Market Since Eisenhower Enters Third Year
The money managers who picked the global stock market bottom say now is no time to sell as the biggest equity rally since 1955 starts its third year.
Laszlo Birinyi, who told clients to buy as the Standard & Poor’s 500 Index fell to a 12-year low of 676.53 on March 9, 2009, says gains that added about $28 trillion to global share values will outlast previous increases as investors who missed the first phase play catch-up. Valuations are still below historical averages, said Barton Biggs, the hedge-fund manager who purchased stocks before the S&P 500’s 95 percent advance.
Rallies in equities, corporate debt and commodities illustrate how the more than $12 trillion pumped into the financial system by governments and central banks is spurring a recovery from the worst global recession since the 1930s. While bears say prices will fall once stimulus ends, billionaire Kenneth Fisher and Byron Wien of Blackstone Group LP (BX) are betting on stocks whose profits are most tied to economic growth.
“These kinds of strong beginnings lead to long and durable bull markets,” Birinyi, who founded Westport, Connecticut-based research and money management firm Birinyi Associates Inc. in 1989 after a decade on the trading desk at Salomon Brothers, said in a March 7 phone interview. “While there will be corrections and while there will be pauses, we’re still of the view that this is a bull market that we expect to go on for several years.”
Previous Bull Markets
Even after almost doubling in 24 months, the S&P 500’s two- year return is about 36 percentage points below the average bull-market gain of 131 percent since 1962, according to data compiled by Bloomberg and Birinyi Associates. The 730-day rally without a decline of 20 percent or more compares with an average duration of 1,407 days, the data show.
The S&P 500 fell 0.1 percent to 1,320.02 today.
Genworth Financial Inc. (GNW), the Richmond, Virginia-based mortgage guarantor and life insurer, increased the most in the S&P 500 since the market’s bottom, climbing more than 14-fold. General Growth Properties Inc. (GGP), the Chicago-based mall owner, led the MSCI All-Country World Index of 45 developed and emerging markets, rising 5,066 percent.
The two-year advance is the biggest for the S&P 500 since the rally following the end of the Korean War and the election of President Dwight D. Eisenhower, according to data compiled by Bloomberg and S&P. The index has risen in 18 of 24 months, data compiled by Bloomberg show.
Five straight quarters of U.S. profit growth and the biggest yearly increase since 1988 have held down valuations, data compiled by Bloomberg show. The U.S. benchmark index is trading at 15.5 times reported earnings, compared with the average ratio of 19.7 at bull-market peaks. The S&P 500’s earnings yield, or annual income divided by the index price, is 2.96 percentage points higher than the payout on 10-year Treasuries, the widest gap at the two-year point of any bull market since 1962, the data show.
“I don’t think valuations are stretched,” Biggs, who oversees $1.4 billion as managing partner of New York-based Traxis Partners LP, said in a March 7 phone interview. “The next move in the S&P 500 is more likely to be up than down, and that move could be 10 percent to 15 percent.”
When Biggs bought shares in March 2009, the purchases were a contrarian bet driven by what he said was the highest level of bearish sentiment ever. Lehman Brothers Holdings Inc. had collapsed six months earlier, Warren Buffett, the chairman of Berkshire Hathaway Inc., said the economy was in “shambles” and New York University’s Nouriel Roubini, who foresaw the crisis, said the S&P 500 may fall to 600.
Stocks surged as record-low Federal Reserve interest rates, along with a $787 billion stimulus bill signed into law by U.S. President Barack Obama and his administration’s plan to rid banks of toxic assets, boosted investor confidence. Buying shares is a “potentially good deal” for long-term investors, Obama said six days before the slump ended.
Now Biggs is counting on economic and profit growth to spur gains. Citigroup Inc.’s Economic Surprise Index for the U.S., a gauge of how much reports are exceeding the median economist estimates in Bloomberg News surveys, surged to a record last week as manufacturing growth topped forecasts and the jobless rate unexpectedly fell to an almost two-year low.
S&P 500 companies will boost earnings by 17 percent during the next 12 months to a record $99.82 a share, according to analyst estimates compiled by Bloomberg. Profits in the MSCI All-Country Index may climb 20 percent, analyst forecasts show.
“We’re in a major expansion globally,” according to Fisher, who oversees $44 billion at Woodside, California-based Fisher Investments Inc. and said in September 2009 that the rally in equities was too big to reverse. “Corporate earnings are great.”
The S&P 500’s annualized appreciation since the 2009 low is 43 percent, compared with predictions for a “new normal” of below-average returns by Mohamed El-Erian and Bill Gross, the co-chief investment officers at Pacific Investment Management Co., which oversees the world’s largest bond fund in Newport Beach, California. Pimco said in May 2009 that financial assets would trail historical averages because of government deficits and increased regulation.
“Today, markets are reacting to a tug of war,” El-Erian said in an e-mail to Bloomberg News yesterday. “On the one hand, improving endogenous growth dynamics in the U.S. and core Europe, and particularly Germany. And, on the other hand, headwinds including high and volatile oil prices, complex policy challenges, budget uncertainties and Europe’s peripheral debt crisis.”
For analysts who warned investors to sell before the credit crisis that sent the S&P 500 down as much as 57 percent starting in 2007, the rally proved harder to anticipate. David Rosenberg of Gluskin Sheff & Associates Inc., ranked the No. 2 economist by Institutional Investor magazine in 2008, and Roubini stuck to bearish forecasts. Now, they say the end of stimulus spending and rising oil may threaten returns.
Rosenberg, based in Toronto, said in March 2009 that the S&P 500 was at risk of falling to 600 by October of that year. Instead, it climbed 53 percent to 1,036.19 on Oct. 30. Three days before the index reached its 2010 low, Rosenberg saw a pattern that he said would bring more stock losses and cited the outlook for earnings and “heightened uncertainty” about the economy. The U.S. expanded at 2.6 percent and 2.8 percent annual rates in the third and fourth quarters, respectively, while S&P 500 earnings exceeded estimates in both periods.
No Straight Line
“Nothing moves in a straight line,” Rosenberg said yesterday in an e-mailed response to questions from Bloomberg News. The economic expansion is already reflected in stock prices, and the market will probably fall once the Fed stops buying assets, he said. It’s “time to take risk off the table,” he said.
Declines in bearish bets and data showing more hedge funds are speculating stocks will rise than at any time since 2007 may be signs that the pool of buyers for equities is being depleted.
A gauge compiled by TrimTabs Investment Research and BarclayHedge Ltd. measuring how heavily hedge funds are invested in stocks rose to 33 percent in January, the last month data are available, compared with an average of 29 percent since 2000. Shares borrowed and sold to profit from declines dropped four straight months to 3.3 percent of all stock at the end of January, according to data compiled by NYSE Euronext.
Roubini said on March 9, 2009, that it was “highly likely” the S&P 500 would fall to 600 in 2009 and that the recession would last into 2010, even if the U.S. did “everything right with fiscal and monetary policy.” The world’s largest economy stopped contracting in June 2009, according to the National Bureau of Economic Research. The economist called for slower growth in October 2010, when he said GDP growth could slow to 1 percent by the end of last year as stimulus becomes a “fiscal drag.” The expansion was almost three times that rate during the final three months of 2010.
Some developed economies may slide back into recession if oil surges to $140 a barrel, Roubini, chairman of Roubini Global Economics LLC in New York, told reporters in Dubai yesterday. The 52-year-old economist also said the European Central Bank may raise interest rates “too soon,” curbing growth and hurting indebted nations including Greece that face record borrowing costs.
The recovery turned a $1,000 investment in the MSCI All- Country World Index into about $2,097 including dividends through yesterday, according to Bloomberg data. That compares with $1,593 for commodities, $1,277 for global corporate bonds and $1,044 for Treasuries, according to indexes compiled by Standard & Poor’s, Goldman Sachs Group Inc. (GS) and Bank of America Merrill Lynch.
U.S. investment-grade debt performed better than bonds from other nations, returning 35 percent over the same period, while speculative-grade credit almost matched the S&P 500, rising 93 percent since March 9, 2009.
“Over the past few years anything associated with risk has done phenomenally well,” said William Cunningham, co-head of global active portfolio management and head of global fixed income research at Boston-based State Street Global Advisors, which oversees almost $2 trillion. With interest rates likely to rise, “fixed income will deliver less than equities going forward,” he said.
‘Passing the Baton’
Fed Chairman Ben S. Bernanke has remained committed to the central bank’s plan of purchasing $600 billion of assets through June and said March 2 that he hasn’t ruled out an expansion of the program. There’s a 90 percent chance the Fed will keep its target for the overnight lending rate between banks in a range of zero to 0.25 percent at its June meeting, compared with an 87 percent chance a month ago, according to CME Group Inc. (CME) futures.
“The government is slowly passing the baton to the real economy, and we’re moving from government stimulus to a self- sustaining growth,” said Robert Doll, chief equity strategist for fundamental equities at New York-based BlackRock Inc. (BLK), the world’s biggest money manager with $3.6 trillion.
The leaders of the equity bull market are shifting as the U.S. economic expansion accelerates and investors become more willing to risk money on companies where weaker economic growth or earnings increases have pushed down valuations.
The MSCI All-Country World Index’s 100 worst-performing stocks of 2010 rose 5.7 percent as a group this year through yesterday, while last year’s best performers fell 0.2 percent, according to data compiled by Bloomberg. U.S. stocks are beating developing-nation shares after the S&P 500 climbed 5 percent in 2011, compared with a 1.3 percent drop in the MSCI Emerging Markets Index.
Investors have added about $24 billion to U.S. equity funds this year, while pulling more than $16 billion from emerging markets, according to data and estimates compiled by the Investment Company Institute and EPFR Global.
Biggs is placing his biggest bet on American companies, with about 55 percent of his holdings in the country, and Doll said U.S. shares are likely to beat equities in other nations. Both favor stocks that rally most during economic expansions, including commodity producers and technology companies.
Apple Inc. (AAPL), the world’s most valuable technology company, is Birinyi’s biggest holding. The Cupertino, California-based maker of iPads and iPhones will boost net income 53 percent this year, according to the average analyst estimate compiled by Bloomberg. The shares have advanced 9.3 percent since Dec. 31, rebounding from a 2.3 percent drop on Jan. 18 after Chief Executive Officer Steve Jobs said he would take a medical leave of absence.
“This is going to be a good year for the stock market,” said Wien, the vice chairman of Blackstone Advisory Partners. “The real growth in the U.S. economy is going to be favorable. I don’t think valuations are excessive.”
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