Investor Confidence Trails Consumers by Most Since 1995
U.S. consumer confidence and equity valuations are diverging the most in 17 years as the economy and profit growth leave stock prices behind.
The Standard & Poor’s 500 Index has traded at an average price-earnings multiple of 13.9 this year, 0.18 times the mean level of the Thomson Reuters/University of Michigan final index of consumer sentiment, according to data compiled by Bloomberg. The gap is the widest since 1995, when the S&P 500 gained 34 percent for its biggest annual rally of the last five decades.
Bears say the discounted valuations are still too high and anticipate the slowing U.S. recovery will lead to a repeat of last year, when equities lost 19 percent in five months. Bulls say price-earnings ratios as low as during the financial crisis make no sense with housing and industrial production expanding and the U.S. Federal Reserve standing ready to act should employment worsen.
“The world is profoundly underinvested in U.S. equities,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida. His firm oversees $350 billion. “We’re in a confidence crisis, so Mr. Market is unwilling to put a big, higher P/E ratio on it.”
The S&P 500 advanced 0.4 percent last week to 1,362.66 and gained 7.4 percent this year, as Fed Chairman Ben S. Bernanke said he is prepared to act to boost growth should the labor market fail to improve. The comments helped offset a lowered forecast for 2013 global growth from the International Monetary Fund, giving the S&P 500 its first back-to-back weekly advance since June. The U.S equity benchmark retreated 0.9 percent to 1,350.52 today.
Earnings for the 123 companies in the S&P 500 that have reported quarterly results so far are beating analyst projections by an average 4.6 percent, data compiled by Bloomberg show. That’s masking weaker sales growth in the most recent quarter as companies improve margins to top estimates. Only 41 percent of the reported companies have topped analysts’ estimates on sales, while 73 percent have beaten on profit, the data show.
EBay Inc. (EBAY), the world’s biggest auction site, and Coca-Cola Co., the largest soft-drink maker, rose after posting profit and sales last week that beat forecasts. Microsoft Corp., the biggest software maker, reported higher earnings than projected and rose 2.5 percent last week. The maker of the Windows operating system missed analysts’ sales estimate by less than 1 percent.
McDonald’s Corp., the world’s No. 1 restaurant chain by value, Lockheed Martin Corp. (LMT), an aerospace company that counts the U.S. government as its biggest customer, and AT&T Inc., the second-largest phone company by market value, are among the more than 172 companies reporting earnings this week.
While more than $2.5 trillion has been added to American equity values since the start of 2010, the gains came as the S&P 500’s price-earnings ratio contracted 23 percent, data compiled by Bloomberg show. The index’s multiple, a gauge of investor sentiment because it reflects expectations for earnings growth, was 13.9 last week, down from 18.9 in January 2010 and compared to the 16.4 average since the 1950s.
Consumer confidence as measured by the University of Michigan survey has increased, climbing to an average of 75.3 in 2012 from 71.8 in 2010 and reaching a four-year high of 79.3 in May, data compiled by Bloomberg show. The gauge has tracked stocks during swings in the market, holding above 90 from June 1996 to March 2000 when the S&P 500 rallied 128 percent.
The sentiment gauge averaged 67.4 in 2011, a year when the mean valuation for S&P 500 companies was almost a point higher, data compiled by Bloomberg show. The last time valuations were this low relative to consumer confidence was in 1995, during an eight-year bull market in which the S&P 500 quadrupled.
Stock prices already reflect the worst outcome for the economy and there are signs it will be avoided, according to Lawrence Creatura, who helps oversee $367 billion as a Rochester, New York-based fund manager at Federated Investors Inc. New home starts last month climbed to an almost four-year record and light-vehicle sales signal the auto market is on pace for the best year since 2007, while economists say the U.S. may expand faster this year than last.
“You’ve already paid as a stock holder for a part of any recession which may or may not occur,” Creatura said in a July 19 phone interview. “I don’t think that investors are right to be shying away from stocks. The low valuations are enough to justify buying.”
Stock volatility may be preventing buying after U.S. equity declines of at least 15 percent began in the last two Aprils. The S&P 500 has gained or lost about 1 percent each day in the past 12 months, almost twice the rate in the previous year. The average since the 1960s is 0.7 percent, according to data compiled by Bloomberg.
Investors are bracing for a repeat of the 2008 financial crisis, which wiped out as much as $10.8 trillion of U.S. equity value, according to James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees $278.2 billion. The S&P 500 dropped 2.5 percent on June 1 after the Labor Department said unemployment rose to 8.2 percent and payrolls missed estimates. It lost 1.6 percent on June 25 as European leaders gathered to address a banking crisis in Greece.
“People had a near-death experience in 2008 and 2009 with the crisis, and they are afraid that could happen again,” Swanson said in a July 18 phone interview. Investors “are afraid of the markets, when I don’t think they should be,” he said. “It’s probably a good time to look at the market.”
The lack of confidence can be seen in the outperformance of defensive industries since the S&P 500’s 2012 high on April 2. Phone stocks, utilities, consumer staples and health care companies were the only ones to gain among the 10 groups. Investors have been buying dividend stocks at a time when more companies are paying them. In the second quarter, 369 companies in the S&P 500 raised or maintained their dividends, the most since at least 2004, data compiled by Bloomberg show.
Mutual funds that invest in U.S. equities saw $1.47 billion in net outflows for the week ending July 11, after 14 straight months of withdrawals that totaled about $200 billion, according to data from the Washington-based Investment Company Institute. Strategists are telling clients choosing portfolios to put the least amount into U.S. stocks since 1997, according to the average of Wall Street firms surveyed by Bloomberg.
“The main things investors are focusing on are the ongoing crisis in Europe and weaker economic data for the U.S.,” Wayne Lin, a money manager at Baltimore-based Legg Mason, said in a July 20 phone interview. His firm oversees $627 billion. “There’s a lot of event risk that can lead to volatility, and that’s the big worry these days.”
While investor sentiment deteriorates, chief executive officers are more optimistic about the future of the economy than they were last year. The CEO Confidence Index, which plots expectations for overall business conditions on a scale of 1 to 10 and is compiled by Chief Executive Group, reached 5.56 last month, compared with 4.88 in September, data compiled by Bloomberg show. Today’s level is 4.3 percent higher than the average since June 2009, when the worst recession since the Great Depression ended.
Home prices are stabilizing and starting to increase. The S&P/Case-Shiller index of property values adjusted for seasonal variations rose 0.7 percent in April, the third straight gain. U.S. homebuilder confidence climbed in July by the most since September 2002, a report last week showed.
The U.S. may expand 2.1 percent this year, the same projection economists held when surveyed in January, data compiled by Bloomberg show. Forecasts last year had come down 0.7 percentage point to 2.5 percent by this time last year.
“Given that our view is slow growth, if that’s correct, it’s a positive thing that expectations are already down,” Christian Andreach, co-head of global equities at Manning & Napier Advisors based in Fairport, New York, which manages about $40 billion, said in a July 19 telephone interview.
EBay, in San Jose, California, rose 8.6 percent on July 19, the most in three months. Profit excluding some items was 56 cents a share, topping the 55-cent average analyst prediction. Second-quarter sales climbed 23 percent to $3.4 billion, beating the $3.36 billion average estimate compiled by Bloomberg.
Excluding an acquisition writedown, Redmond, Washington- based Microsoft (MSFT) reported profit of 67 cents a share. That exceeded the 62-cent average estimate of analysts compiled by Bloomberg. Sales rose 4 percent to $18.1 billion. The shares rose four straight days last week, climbing 2.5 percent for the week, the most since April.
Coca-Cola reported second-quarter profit that topped estimates, helped by pricing increases in North America late last year. Excluding some items, profit totaled $1.22 a share. Analysts projected $1.19, the average of 14 forecasts compiled by Bloomberg. Shares of Atlanta-based Coca-Cola climbed 1.6 percent on July 17, the most in two weeks.
“The policy fog, the problems in Europe, the global slowdown are making people rationally hesitant,” Joseph Quinlan, the New York-based chief market strategist with U.S. Trust, which oversees $333 billion, said in a July 18 phone interview. “This is the time you want to be buying.”
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