The best first-quarter gain for the Standard & Poor’s 500 Index since 1998 sent U.S. stocks above gold by the most in more than a decade, a sign of growing investor confidence in corporate profits as analysts raise earnings estimates for the first time this year.
The S&P 500 climbed 12 percent, 5.3 percentage points more than gold for the widest gap to start a year since 1999, according to data compiled by Bloomberg. The S&P GSCI Total Return Index of 24 commodities gained 5.9 percent over the three months, while Treasuries slipped 1.3 percent, trailing equities by the most since 2009. Corporate bonds increased 2.4 percent and the dollar fell 1.6 percent.
Stocks are diverging from defensive investments such as gold as appetite for risk increases. While bulls see it as a sign profits and the economy are gaining traction, bears point to Federal Reserve Chairman Ben S. Bernanke’s warnings that more stimulus may be needed as evidence that the rally has gone too far. To money manager Laszlo Birinyi, slower gains in precious metals signal pessimism is starting to fade.
“The problem with gold now is that people are starting to accept the economy recovery,” Birinyi, president of Westport, Connecticut-based Birinyi Associates Inc., said in a March 29 phone interview. Even as confidence builds, “people are still too focused on the concerns and the fact that this looks similar to last year, where everyone said sell in May and go away,” he said. “That’s exactly the kind of thing we look for.”
The benchmark gauge for American equities advanced 0.8 percent last week to 1,408.47, bringing the increase for March to 3.1 percent. The S&P 500 rose 0.8 percent to 1,419.04 today.
U.S. Treasuries lost 1 percent in the month after S&P 500 earnings expanded for a ninth straight quarter and manufacturing and home sales improved, while corporate bonds dropped 0.6 percent. The S&P GSCI commodity gauge slipped 2.4 percent and the Dollar Index, which measures the currency against the biggest U.S. trading partners, added 0.3 percent.
Record earnings, improved U.S. manufacturing and retail sales, and attempts by European leaders to contain their debt crisis helped stocks rally in the quarter, beating gold as demand for assets that protect against losses faded. Equities pulled ahead in March when Bernanke damped speculation he would carry out more bond purchases, adding to evidence that the recovery is gathering momentum. He said on March 26 that while he’s encouraged by the decline in unemployment, more stimulus is needed to create jobs.
The rally in gold may pick up speed should central banks signal further action, according to Ioan Smith, a director at Knight Capital Europe Ltd. in London. Futures on the metal surged 1.6 percent on March 26 after Bernanke said the economy needs “continued accommodative monetary policy” to boost jobs.
“If the Fed reinstitutes quantitative easing measures later in the year, coupled with rising fiscal deficits and currency debasement among countries in the developed world, then gold may continue to hold an underlying bid,” Smith said in an e-mail.
Fourteen out of 21 primary dealers in U.S. Treasuries say the Fed will probably need a third round of bond purchases, or quantitative easing, to bolster the economy, according to a Bloomberg News survey.
LSI, Lennar Earnings
The S&P 500 has rallied 28 percent since it reached a one-year low on Oct. 3, gaining as companies from LSI Corp. to Lennar Corp. reported earnings that beat estimates. Profits for the 500 companies will rise 13 percent in 2012 after climbing 9.9 percent in 2011, estimates and data compiled by Bloomberg show. Analysts boosted forecasts by 0.2 percent in the four weeks through March 22 to $104.37 a share in the biggest increase of 2012. They fell during January and February, the data show.
The Commerce Department said last week the economy grew 3 percent during the last three months of 2011, more than any quarter since June 2010. Equity gains came as the Chicago Board Options Exchange Volatility Index, or VIX, sank 64 percent since the end of September, a record two-quarter retreat, Bloomberg data show.
“It’s not just that people bought equities because they had nothing else to do with their money, it’s that the actual underlying businesses had done pretty well,” Michael Shaoul, chairman of New York-based Marketfield Asset Management, which oversees $1.5 billion, said in a March 28 interview. “As people start to realize this, you’ll see a migration of that safe haven trade out of gold and into the portions of the global equity market which are really able to benefit.”
Rallying stocks and the plunging VIX also caused demand for the VelocityShares Daily 2x VIX Short-Term ETN, known by the symbol TVIX, to explode as traders sought a cheap way to protect gains in equities. Interest in the note, which owns VIX futures, was so great Credit Suisse Group AG stopped issuing shares in February after its market value soared to almost $700 million from $162.8 million at the end of 2011.
The combined value of the five biggest VIX-related securities traded on U.S. markets swelled to $2.8 billion as of March 29, more than doubling from the level at the end of 2011. Their market capitalization rises as their sponsors issue new stock to keep the share prices aligned with an underlying index.
The 9.9 percent increase in earnings last year wasn’t enough to spare the S&P 500 from its smallest annual move since 1947, leaving the valuation measure at 13.6 times reported profits on the last day of 2011, 20 percent below the average since 1954, data compiled by Bloomberg show. Since then, the price-earnings ratio climbed to 14.6, about 11 percent below the historic mean.
“The huge monetary thrust has market speculators timing when the liquidity wave will break,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $116 billion in client assets, said in a March 30 phone interview. “Market participants are positioning for a pullback in risk-taking. Investors should consider a second-half growth scare in the U.S. economy, which is not out of the question.”
Companies in the U.S. may struggle to increase earnings as profit margins, or the percentage of sales converted into net income, shrink. Margins for all U.S. companies reached 13 percent last quarter, higher than any time since 1950, according to data compiled by the Commerce Department. For the S&P 500, they’ve narrowed this year by 0.2 percentage point, according to data compiled by Bloomberg.
LSI, a maker of chips used in computer disk drives, jumped to the highest level in almost five years on March 14 after raising its first-quarter sales prediction, citing a stronger-than-expected recovery in the industry. Analysts boosted 2012 earnings projections for the Milpitas, California-based company 16 percent, the biggest increase among the 500 companies in the benchmark gauge for American equities.
Projections for 2012 profit at Lennar are up 10 percent from four weeks ago, with analysts forecasting a 67 percent increase, data compiled by Bloomberg show. The third-largest U.S. homebuilder by revenue reported better-than-estimated net income for the period ending Feb. 29 after new home orders rose. The stock increased 38 percent last quarter, the best January-to-March period since 1998.
Financial companies, technology shares and the consumer-discretionary group led gains in the S&P 500 last quarter, with each rising at least 16 percent. The two worst-performing industries were phone stocks and utilities, industries investors typically flock to in times of economic uncertainty for their higher dividend yields.
“Confidence is returning on the recovery and as it does, gold’s relative standing is diminishing,” James Paulsen, who helps oversee about $333 billion as chief investment strategist at Minneapolis-based Wells Capital Management, said in a March 26 phone interview. “The biggest friend of gold in recent years is the same biggest friend of the bond market: fear. When confidence has returned and fear dissipates, gold pales.”
Even with the rally, individuals have been reluctant to put money in equities. Net outflows of funds that invest in U.S. equities totaled $2.13 billion in January and $3.21 billion in February. The withdrawals continued into March, with $1.8 billion out in the week ended March 21 and $2.9 billion the week before, according to the Investment Company Institute in Washington.
Gains in stocks came as the unemployment rate reached 8.3 percent in January after falling five straight months, home sales beat estimates and the Conference Board’s gauge of consumer confidence rose to the highest level in a year. The world’s largest economy will grow 2.2 percent this year, up from the 1.7 percent in 2011, according to the median of 72 economists surveyed by Bloomberg.
“The perceived risk in the outlook for the global economy is now somewhat lower than what it was even three months ago,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $72 billion. Gold’s underperformance is a “sign that investors are regaining some of the lost confidence in the capitalistic system as a whole.”