Swings Seen Ending After 15 Years for S&P 500: Chart of the Day

Fifteen years of up-and-down swings in U.S. stocks may finally come to an end, according to Jeffrey Kleintop, LPL Financial Corp.’s chief market strategist.

The CHART OF THE DAY highlights one of four reasons for Kleintop’s outlook, presented this week in a report: stocks are cheap by historical standards even though the Standard & Poor’s 500 Index is approaching its past highs.

Within the past two weeks, the S&P 500 has closed less than 7 percent below its record of 1,565.15, set in October 2007. The index was valued at 14.5 times profit as of yesterday, according to data compiled by Bloomberg. The price-earnings ratio stood at 17.5 when the earlier peak was reached and 31 when the index climbed to a high in March 2000.

The ratio would have to drop below 10 for the S&P 500 to revisit its March 2009 low, Kleintop wrote in the Oct. 8 report. That hasn’t happened since 1985, when the economy was recovering from inflation and unemployment rates of more than 10 percent.

Along with valuation, growth since 2000 in earnings, dividends and the economy will lend support to stocks, the Boston-based strategist wrote. The combination may limit the effects of a sluggish global economy, European financial stress and U.S. budget battles, the report said.

“Stocks are likely to weather nearly any outcome” better than they would have at other times, Kleintop wrote. Individual investors may be too cautious, he added, citing data from the Investment Company Institute that showed money flowed out of equity mutual funds in the second half of September.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net