Amid a backdrop of expected strong growth in real gross domestic product, a pickup in merger activity, and stronger-than-expected third quarter operating results from U.S. companies, Standard & Poor's Investment Policy Committee (IPC) voted on Oct. 29 to make a change to its recommended investment allocation. The IPC, a group of senior managers who meet weekly to oversee all investment-related activity done in S&P's name, increased recommended equity exposure to 65% from 60%, and reduced suggested bond holdings to 10% from 15%. Cash was maintained at 25%.
Also instrumental in the decision: the improvement in the quality of reported earnings per share, as well as the expected narrowing of the spread between the p-e ratio on operating earnings for the S&P 500 index with that for S&P Core Earnings from 18 percentage points in 2000 to two percentage points by the end of 2004.
As for the change in the bond recommendation, S&P believes that bond prices will likely suffer from the expected gradual rise in the yield of the 10-year note normally associated with a pickup in economic activity.
In its previous actions this year, the IPC voted on July 30 to reduce the recommended equity exposure to 60% from 65%. The suggested bond allocation was increased to 15% from 10%. Cash exposure was left unchanged at 25%. Also, it voted on June 25 to lower its recommended bond exposure to 10% from 15% and raise its suggested cash allocation to 25% from 20%.
The IPC expects the S&P 500 to close 2003 at 1,085, and end 2004 at 1,190, for annual gains of 23% and 10%, respectively.
From Standard & Poor's Investment Policy Committee