U.S. Stocks Top All Other Assets for First Time Since ’95
U.S. stocks are beating every 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 has rallied 14 percent in 2012, beating Treasuries, 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 the biggest annual advance of the last five decades. With a price-earnings ratio close to today’s level, the index gained another 93 percent in the next 2 1/2 years.
For all the concern about unemployment and manufacturing growth, the best assets this year remain American companies after unprecedented steps by the Federal Reserve to support growth. Forecasts for a rebound in the U.S. economy and the central bank’s pledge to keep interest rates near zero for years convinced bulls the S&P 500 will extend gains. Bears say political gridlock will drag down prices after 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, which oversees $100 billion. “This is a major green light for equities and the fact that people don’t see it, is great.”
Treasuries have returned 3.3 percent in 2012, compared with 9.9 percent for U.S. investment-grade corporate bonds and 14 percent for high-yield debt, based on Barclays Plc index data. The S&P GSCI Index of 24 commodities advanced 1.7 percent, while the Dollar Index (DXY) that measures the U.S. currency against those of six trading partners weakened 0.7 percent.
The S&P 500 gained 0.3 percent last week to 1,433.19 following better-than-estimated data on U.S. housing starts and as earnings from Citigroup Inc., Honeywell International Inc. (HON) and Mattel Inc. topped forecasts. Including dividends, the index is up 16 percent this year, led by PulteGroup Inc., Sprint Nextel Co. and Gap Inc., which have risen more than 96 percent. The S&P 500 added 0.1 percent to 1,434.16 at 10:03 a.m. New York time.
The bull market will last another year as individuals regain confidence and return to equities after withdrawing money since 2007, according to Laszlo Birinyi, the president of Birinyi Associates Inc. in Westport, Connecticut. Investors have pulled about $100 billion from U.S. stock funds this year and added $250 billion to bond funds, according to data from the Investment Company Institute in Washington.
“I don’t think you’ve seen the signs of a frothy, toppy market,” Birinyi, who traded equities at Salomon Brothers Inc. in the 1980s, 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.
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 percent 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 (DAX) has jumped 25 percent as investors raised expectations policymakers will solve Europe’s debt crisis. The Athens Stock Exchange General Index soared 28 percent on optimism Greece will reach a deal with the IMF and European partners to remain in the euro zone. Silver, corn and platinum have risen at least 15 percent.
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 Santa Fe, New Mexico-based Thornburg Investment Management Inc., which oversees about $83 billion, 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.”
Intel Corp. (INTC) and International Business Machines Corp. (IBM) reported results last week that showed the global economic slowdown is prompting companies to curtail technology spending. The stocks have fallen every day since releasing quarterly earnings, with Intel down 2.5 percent in the first trading session and IBM losing 4.9 percent, the biggest loss since October 2009.
General Electric Co. (GE), the biggest maker of power-generation equipment, fell 3.4 percent on Oct. 19 when it reported revenue 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 percent 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 percent 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 percent a quarter since the start of 2010. They’re projected to pick up in 2013, increasing 5.7 percent, the data show. For the 117 companies in the S&P 500 that have reported quarterly results so far, earnings are exceeding estimates by 4 percent on average, while sales are increasing 1.8 percent, according to data compiled by Bloomberg.
Wall Street strategists tracked by Bloomberg predict the S&P 500 may surpass its all-time high next year. The benchmark may end 2013 at 1,585, according to the median forecast of five analysts polled by Bloomberg News, 1.3 percent higher than a record in October 2007.
The improvement in the U.S. economy and signs Europe’s debt crisis may be easing made Treasuries less attractive than equities this year. The yield on the benchmark 10-year bond fell to 1.38 percent on July 25, according to Bloomberg data, a record low. It finished last week at 1.76 percent, from 1.88 percent at the end of 2011.
Barclays Plc’s 10-20 Year Treasury Total Return Index has climbed 3.3 percent this year. The Barclays Municipal Bond Index has advanced 6.1 percent, while a gauge of Treasury inflation- indexed notes known as TIPS added 6.3 percent.
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 percent in 2012 and a gauge of high-yield credit advanced almost 14 percent. The S&P Leveraged Loan 100 Total Return Index is up 9.7 percent this year, while the HFRI Hedge Fund-Weighted Composite Index added 4.8 percent .
The S&P GSCI commodity index is poised for its smallest annual advance since plunging in 2008. China expanded 7.4 percent 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 (MXEF), which tracks stocks in 21 developing nations including China, Brazil and Russia, has climbed 9.8 percent, and the Euro Stoxx 50 Index (SX5E) for the 17- nation euro area is up 9.7 percent.
The 34 percent rally for the S&P 500 in 1995 was the biggest gain in 37 years. The U.S. equity benchmark traded at an average 16.6 times reported earnings and rose more than 19 percent 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 percent of the index’s price, compared with a yield of 2.7 percent 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.”