Record U.S. Stocks at Lowest Valuation Since 1980

USA EconomyMy Comments: Many of my clients are elderly clients. For many, their investment horizon going forward is not 20 years or more. They have little need to take what many of them think of as aggressive steps to grow their money.

On the other hand, good advisors today are encouraging their clients to be more aggressive. There is a pervasive and collective sense that the next 12 to 24 months are going to be very positive months for the stock market. Not that there might not be a 4% correction or two along the way, but nothing that suggests anything like what we saw in 2008-2009.

So this article is yet another that if you believe the world is NOT coming to an end anytime soon, you should put some of your money to work in the stock market. Call me, I have a good solution.


Even though U.S. stocks more than doubled during the four-year bull market, individual investors’ aversion to equities has left companies in the S&P 500 cheaper than at any record high since 1980.

The S&P 500 rose to an all-time closing high of 1,563.23 March 14, up more than 130% from its 2009 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 March 5 and has gained about 11% this year.

Although individuals have added almost $20 billion to U.S. stock funds so far this year, the amount is just 3.5% 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 that there is plenty of money to keep the rally going.
Bears contend that 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 Holland & Co., said March 14.

“Valuations are extremely low. When there’s an absence of really bad news, the path of least resistance is up,” said Mr. Holland, whose firm oversees more than $4 billion.

The S&P 500 has risen about 9% this year. The Dow industrials were trading above 14,530.11 last Wednesday.
In March, the number of Americans filing for jobless benefits fell to the lowest level in almost two months, retail sales increased more than forecast and the housing market strengthened.

Indexes did give back a bit last week 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% 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-year period though 2012 before becoming net buyers in January, data from the ICI show.

Even now, private investors remain skittish, withdrawing an estimated $1.7 billion in the two-week period through March 6 and pushing $10.5 billion into bonds.

“This big rotation from bonds to equities is not in full swing,” Alan Zlatar, who helps oversee $65 billion as head of multiasset class investments at Vontobel Asset Management Inc., said March 13.

“Our clients are seeking returns, and so far most of them have tried to stay within the bond space,” he said. “What speaks in favor of equities is, of course, that the alternatives are extremely pricey.”

Stocks are close to the least expensive ever versus government bonds, as measured by a valuation method favored by former Fed Chairman Alan Greenspan that compares earnings with interest payments.

S&P 500 companies currently generate profit equal to 6.5% of their share prices, about 4.5 percentage points more than yields on 10-year Treasuries.

The average spread in the past 10 years was about 2.5 percentage points, data compiled by Bloomberg show.

The combination of stocks being near all-time highs and declining trading volume indicates that money isn’t coming into the market and that equities are rising because fewer people are selling, according to Murray Roos, co-head of European equities at Deutsche Bank AG.

On average, 2.53 billion shares changed hands in S&P 500 companies each day this year, Bloomberg data show. That compares with 3.59 billion between 2009 and 2012.

“There aren’t sellers. That’s why the equity market is looking fundamentally cheap,” Mr. Roos said.
“We’ve got latent demand for equities,” he said. “We are at the start of a protracted move up in equity markets.”