With stock valuations now more attractive after the recent market rout, Standard & Poor's Investment Policy Committee -- a group of senior managers who meet weekly to oversee all investment-related activity done in S&P's name -- has decided to change its asset-allocation recommendation for investors.
The committee voted on Aug. 7 to increase the recommended equity exposure by five percentage points, to 60%, and reduce the bond portion to 15%, from 20%. The recommended cash allocation remains at 20%.
The committee's move comes after it voted to lower the recommended stock allocation in both April and June, 2002. The S&P 500 has fallen 15% since the IPC's June recommendation.
The committee feels that since valuations are now at or below historic norms, earnings are likely to increase in the coming quarters, that the technical picture has improved, and equities now have greater upside potential than downside risk.
And changing sector weightings in the S&P Super 1500 -- the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes -- also played a part. Information Technology now represents only 13.6% of the market capitalization of the S&P Super 1500, down from its March, 2000 peak of 35%. However, the Consumer Discretionary, Financials, and Health Care sectors that will benefit greatly from ongoing demographic shifts, now represent nearly 50% of the broader market's overall weighting.
The markets have been showing increased resilience, holding above their July 23 lows. Even though an extended period of base-building is likely, due to the technical and psychological damage, we believe a bottom has been established.
The average post-war bear market gave back 62% of the prior bull market's advance, with a low of 29.7% in 1956-57 and a high of 113.8% in 1973-74. This time around, the S&P 500 retraced 59% of its prior bull-market gain -- very close to the average.
From Standard & Poor's Investment Policy Committee