Reluctant Bulls Key for Birinyi Amid Record S&P 500 Rally
The Standard & Poor’s 500 Index (SPX)’s record rally probably has another year to go as investors give up their pessimism and buy, according to Laszlo Birinyi, one of the first money managers to tell clients to buy before the bull market began.
“As long as you have this sort of hesitancy or reluctance instead of acceptance, the positive case is still very much intact,” Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut, said in a March 26 phone interview. “Don’t go looking for the exit. Leave the door open for a good year, because that is the one possibility that I do not hear.”
The S&P 500 rose 0.4 percent to 1,569.19 yesterday, exceeding its previous record from October 2007 and recovering losses from the financial crisis that wiped more than $10 trillion from U.S. market value. Even with the rally, share volume on all U.S. exchanges has declined for four straight years and, at less than 6.4 billion shares a day, is the lowest since at least 2008, according to data compiled by Bloomberg.
Birinyi advised clients to purchase shares before March 2009, when the S&P 500 reached a 12-year low. The U.S. equity benchmark is up 132 percent since then. While companies with earnings most-tied to the economy such as retailers, computer makers and banks have led the advance, makers of home products such as soap and drugmakers are up the most in 2013.
“It’s surprising to see that it’s not the deep cyclicals or the names that I would have expected in a really good market,” Birinyi said. “It just shows that people are comfortable with the market, and there’s a little bit more of a focus on stock picking than people realize.”
S&P 500 profits are expanding for a third year and the U.S. Federal Reserve remains committed to continuing its unprecedented economic stimulus. The Fed pumped more than $2.3 trillion into the economy through monetary easing since 2008, sending Treasury yields to record lows last year. Per-share earnings are projected to reach $109.40 this year, compared with about $62 in 2009, analyst forecasts compiled by Bloomberg show.
While profit estimates are set for a record, growth slowed last year to 8.1 percent for the fourth quarter compared with the 28 percent average of 2010 and 2011, data compiled by Bloomberg show. Analysts also cut their projections for the first quarter to a contraction of 1.8 percent from growth of 1.2 percent at the beginning of the year.
“What I see looking forward is pretty flat earnings growth,” Jeffrey Kleintop, the Boston-based chief market strategist at LPL Financial Corp., which oversees $350 billion, said by telephone on March 28. “This market needs earnings to turn up before it can really begin to move higher.”
Health-care stocks and consumer staples shares leading the rally also signal the advance in the S&P 500 may slow, he said.
“You don’t usually see defensive groups leading the market to all-time highs,” Kleintop said. “What that suggests is that the rally may be getting a little tired. We might see something like we’ve seen in last few years -- a pullback starting in April.”
In the four years since the bull market started, the S&P 500 nearly entered a bear market twice, losing 16 percent over two months in 2010 and 19.4 percent in about five months in 2011. Both declines began in April. It recovered both times as the Fed committed more quantitative easing to boost the economy.
The benchmark index for American stocks ended the first quarter with a gain of 10 percent, its best performance in a year. Stocks will continue to advance as investors who previously shunned shares capitulate and buy, Birinyi said. He predicted in January that the S&P 500 has a more than 50 percent chance of climbing past 1,600 this year. The U.S. equity benchmark would have to climb almost 2 percent to reach that level.
More Gains Predicted
The average year-end prediction of 17 Wall Street strategists surveyed by Bloomberg is for the S&P 500 to hit 1,583 (SPXSFRCS). The gauge’s advance since 2009 already exceeds the average bull-market return of 120 percent, Birinyi data show. Two of the last nine cycles have rallied more: the 302 percent gain in the 1990s and 229 percent in the 1980s, the data show.
The S&P 500’s record comes about three weeks after the Dow Jones Industrial Average (INDU) exceeded its previous high on March 5. The 30-member gauge has advanced 2.3 percent since then, led by Hewlett-Packard Co. and Boeing Co.
While investors poured $14.1 billion into equity mutual funds last month, the amount compares with $20.2 billion added to bond funds, data from Washington-based Investment Company Institute show. More than $600 billion was drained from stock managers in the six years through 2012, the data show.
Wyndham Worldwide Corp., CBS Corp. and Tenet Healthcare Corp. are among six stocks that have added more than 1,000 percent since March 2009. For 2013, Netflix Inc. (NFLX) has gained the most, more than doubling since the start of the year, while Best Buy Co. and Hewlett-Packard are up more than 67 percent.
“I have not seen the kinds of things that would trouble me,” Birinyi said. “When I start seeing people talking about S&P 2,000 or buy more Netflix after it’s up that much, then it starts to trouble me.”
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