In Spite Of Market Rally, S&P Stocks At Lowest Valuation Since 1980

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 but individual investors continue to avoid 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 News. 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.  The absence of private buyers shows there’s plenty of money to keep the rally going. However, in the absense of retail investors the rally may be too dependent on Federal Reserve stimulus and will fizzle once central bank support ebbs.

About $10 trillion has been added to U.S. stock prices since the market bottomed on March 9, 2009, during the worst financial crisis in seven decades.

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 2013. Even now, retail investors remain skittish, withdrawing an estimated $1.7 billion in the two weeks through March 6 and pushing $10.5 billion into bonds.

“The individual investor doesn’t seem like they’ve come back to the market yet,” Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, said. The firm manages $3.8 billion. “People aren’t convinced this is for real. They’ve been burned twice in a big way, and there’s still doubt.”

Source:  Bloomberg News

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association