Stocks at Lowest Valuation Since 1980 even as Records Set
March 18, 2013
Even after U.S. stocks more than doubled in the four-year bull market, companies in the Standard & Poor’s 500 Index are cheaper than at any record high since 1980 as individual investors shun equities.
The S&P 500 rose to within 1 percent of its high last week, gaining 131 percent from its lows. The index trades at 15.4 times reported profit, below the average 19.9 reached in bull markets since 1962, according to data compiled by Bloomberg. The Dow Jones Industrial Average erased all losses from the financial crisis on March 5 and has added 11 percent this year.
While individuals added almost $20 billion to U.S. stock funds this year, the amount is just 3.5 percent of the withdrawals since 2007 and compares with $44 billion placed with fixed-income managers in 2013, according to the Investment Company Institute. For bulls, the absence of private buyers shows there’s plenty of money to keep the rally going. Bears say the pessimism means the rally is too dependent on Federal Reserve stimulus and will fizzle once central bank support ebbs.
“I was down on the floor of the New York Stock Exchange when the Dow hit its new high and there weren’t any champagne corks popping or people getting excited,” Michael Holland, chairman and founder of New York-based Holland & Co., said in a March 14 phone interview. His firm oversees more than $4 billion. “Valuations are extremely low. When there’s an absence of really bad news, the path of least resistance is up.”
Reaching Records
The S&P 500 increased 0.6 percent to 1,560.7 last week, bringing the year’s advance to 9.4 percent. The Dow average climbed to 14,514.11 after reaching a record on eight consecutive days. Americans filing for jobless benefits fell to the lowest in almost two months, retail sales increased more than forecast and the housing market strengthened.
Futures on the S&P 500 slid 1 percent at 8:09 a.m. in London today as the euro area imposed a levy on Cypriot bank deposits to reduce the cost of rescuing the nation’s lenders.
About $10 trillion has been added to U.S. share values since the market bottomed on March 9, 2009, during the worst financial crisis in seven decades. Confidence among households was shattered by the S&P 500’s 57 percent plunge from its October 2007 highs.
Institutions have been the main beneficiaries of the rally. Individuals drained more than $600 billion from equity mutual funds in the six years though 2012 until becoming net buyers in January, data from the Washington-based ICI show. Even now, private investors remain skittish, withdrawing an estimated $1.7 billion in the two weeks through March 6 and pushing $10.5 billion into bonds.
‘Big Rotation’
“This big rotation from bonds to equities is not in full swing,” Alan Zlatar, who helps oversee $65 billion as head of multi-asset class investments at Vontobel Asset Management in Zurich, said in a phone interview on March 13. “Our clients are seeking returns, and so far most of them have tried to stay within the bond space. What speaks in favor of equities is, of course, that the alternatives are extremely pricey.”
