Profits in the Standard & Poor's 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 6 points of last year's peak.
The S&P 500 fell 0.3 percent to 1,357.66 yesterday, trimming a rally since October that has added more than $3.2 trillion to share values, according to data compiled by Bloomberg. While the index is 0.4 percent below the 2011 high of 1,363.61, expanding earnings have pushed the price-earnings ratio to 14 from 15.4 in April.
Economic growth that has been slower than any post- recession period since at least the 1940s is keeping investors from paying more for earnings even after stocks doubled in three years. The best January for the S&P 500 in 15 years has coincided with a decline in New York Stock Exchange trading volume to the lowest level since 1999 and record deposits with investment-grade bond funds.
“The world is profoundly underinvested in U.S. equities,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview on Feb. 21. His firm manages $300 billion. “The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen.”
Topping Estimates
Corporate profits have topped analyst estimates for 12 straight quarters. Analysts that cover companies in the S&P 500 project earnings will rise this year to $104.27 a share, the highest level ever, according to data compiled by Bloomberg. That would represent a 69 percent increase in earnings since 2009, compared with the 22 percent rally in the index in the past two years. Earnings for S&P 500 companies from Priceline.com Inc. to MasterCard Inc. and Lorillard Inc. are estimated to jump 9.6 percent from last year.
The S&P 500 has recovered 24 percent since its low on Oct. 3. Its price-earnings ratio of 14 is near the average level last year and has trailed the five-decade average of 16.4 for the longest stretch since the 13-year period beginning in 1973, according to Bloomberg data. The benchmark index fell 0.2 percent to 1,355.59 as of 9:37 a.m. in New York.
The S&P 500's valuation shrank as much as 27 percent in 2011 as S&P stripped the U.S. of its AAA credit rating, President Barack Obama and Congress debated deficit cuts and Europe was forced to bail out Greece. The European Central Bank's three-year lending program for banks and the Federal Reserve's pledge to keep benchmark interest rates low through at least 2014 have failed to bolster investor confidence enough to boost valuations.
‘Powerful Recovery'
“The powerful recovery in earnings thus far has allowed market averages to rise without pushing the P/E higher,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a Feb. 21 e-mail. His firm oversees $600 billion. “Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn.”
U.S. gross domestic product expanded an average 2.4 percent a quarter in the 2 1/2 years since the recession ended in 2009, data compiled by Bloomberg show. The world's largest economy hasn't had a smaller post-recession recovery rate since at least the 1940s, the data show. In the 2003 bull market, GDP rose 2.7 percent on average, before the S&P 500 surged 102 percent. For the 1982 rally, the rate was 5.7 percent. Equities more than tripled in that cycle.
Biggest Swings
Stocks saw unprecedented swings last year as global economic concerns overshadowed S&P 500 fundamentals. The index moved an average 1.3 percent each day from April 2011 through the end of the year, compared with the 50-year average of 0.6 before the September 2008 collapse of Lehman Brothers Holdings Inc., according to data compiled by Bloomberg. The Dow Jones Industrial Average (INDU) alternated between losses and gains of 400 points on four days in August, the longest streak on record.
The swings took a toll on professional and retail investors. A total of 21 percent of 525 global fund categories tracked by Morningstar Inc. topped their benchmark indexes last year, the fewest since at least 1999. A Hedge Fund Research Inc. index (HFRIFWI) of industry performance fell 5.2 percent in 2011, only the third annual loss since 1990 and the biggest decline since 2008, when it plunged 19 percent, according to the Chicago-based firm.
Trading by individuals has been slowing since the 2008 financial crisis. Daily average volume slipped 9 percent last quarter compared with a year ago, according to data from E*Trade (ETFC) Financial Corp., TD Ameritrade Holding Corp. and Charles Schwab Corp. At E*Trade (ETFC), daily trading volume is 35 percent lower than it was at the end of 2008. Revenue-generating trades are down 14 percent in the same period at Schwab.
‘Hard to Jump In'
“When you have a market that has done so well so fast, it's really hard to jump in,” Brian Culpepper, a portfolio manager at James Investment Research Inc. in Xenia, Ohio, which oversees $3.2 billion, said in a telephone interview on Feb. 21. “Everybody is pretty skittish right now on this overall rally. There is by far a better chance for the market to head down than there is for heading up here.”
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Trading (MVOLUSE) at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares, according to data compiled by Bloomberg. The value of stock changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.
Record-low interest rates have failed to keep investors from putting money in bonds. The S&P 500's earnings yield is at 7.1 percent, close to the highest on record when compared with the 10-year Treasury (USGG10YR) rate, according to data compiled by Bloomberg since 1962. U.S. investment-grade bond mutual funds saw a record $3.3 billion in inflows during the week ended Feb. 15, while American equity funds had outflows of $1.9 billion, according to data by EPFR Global and Bank of America Corp.
Unduly Punished
Companies with business focused in the U.S., such as hospital operator Community Health Systems Inc., have been unduly punished, according to Ed Maran, a portfolio manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico, which oversees $80 billion. Community Health trades at 7 times earnings in the past 12 months, compared with the average of 28.5 since it went public in 2000, according to Bloomberg data.
“The uncertainty at the global level probably should not be reflected so greatly in the prices of these types of companies,” Maran said. “As long as we have a resolution of the European sovereign debt problem that's orderly, stocks are very cheap relative to other investment alternatives.”
--Bloomberg News--
