Stock Buying Hits Bull Market Record
Is the risk aversion trend at an end?
BY Caroline Cakebread | July 26, 2010
(Bloomberg) Mutual funds, pensions and endowments are spending more on stocks than at any time since the start of the bull market, just as individuals grow the most pessimistic in a year.
Institutions pushed equities up to 68 percent of their holdings in July, the highest level in 15 months, from 63 percent in April, a Citigroup Inc. survey showed. The ratio of bullish to bearish respondents in a survey by the American Association of Individual Investors has fallen to 0.68, the lowest level since July 2009, based on a four-week average.
The last time money managers and individuals were this far apart was at the beginning of 2009, before the Standard & Poor’s 500 Index began its 63 percent rally, according to data compiled by Bloomberg. It may signal another buying opportunity after concern the U.S. economy will fall into a recession wiped out $1.5 trillion from American equity values since April, according to Fritz Meyer, a Denver-based senior market strategist at Invesco Ltd., which oversees $558 billion.
“That’s good news,” Meyer said. “The retail guy has gotten it wrong more than gotten it right. The odds favor a continued, reasonably healthy economic expansion.”
The U.S. equity benchmark has posted an average return of 8.8 percent in the 12 months after individuals’ skepticism rose this high in the past 23 years, according to data compiled by Bloomberg. Bulls are betting that forecasts for the fastest U.S. profit growth in 15 years and economic expansion averaging 3 percent through 2012 will help equities recover after the S&P 500 fell 13 percent in May and June.
Stocks rallied today after new-home sales in the U.S. topped the median economist forecast and FedEx Corp., the Memphis, Tennessee-based package-delivery company, raised its earnings projection. The S&P 500 climbed 0.9 percent to 1,112.25 at 12:23 p.m. New York time.
Bonds are a better investment than stocks, Jamil Baz, who helps oversee $23 billion as chief investment strategist for London-based hedge fund GLG Partners LP, told Bloomberg Television’s “InsideTrack” on July 22. Government reports this month showing private employers in the U.S. added fewer jobs than forecast in June and the lowest level of housing starts in eight months raised concern the economic recovery will falter.
Equities advanced last week as the S&P 500 gained 3.6 percent, poised for the biggest monthly increase since July 2009. Companies from Atlanta-based United Parcel Service Inc., the world’s largest package-delivery company, to Dallas-based AT&T Inc., the biggest U.S. phone company, climbed after increasing profit forecasts.
The rally trimmed the index’s loss since April 23 to 9.4 percent. Equities slid the most since the bull market began in May and June on concern Europe’s debt crisis would derail the global economic recovery. Shares rebounded in the past three weeks as 84 percent of the 149 S&P 500 companies that reported results since July 12 topped the average analyst earnings estimates, Bloomberg data show.
Profits may rise an average 35 percent in 2010 and 17 percent in 2011, according to forecasts tracked by Bloomberg. More than 160 S&P 500 companies are scheduled to post quarterly results this week, including Irving, Texas-based Exxon Mobil Corp., the biggest U.S. oil producer.
Confidence among smaller investors was shaken by the May 6 plunge that erased $862 billion from the market value of U.S. stocks in 20 minutes and the last bear market, said Frederic Dickson, chief market strategist at D.A. Davidson & Co. Professional investors are more likely to base decisions on the prospects for the biggest two-year advance in earnings among S&P 500 companies since 1995, according to Invesco’s Meyer.
“My money is on the institutions getting it right,” said John Lynch, chief equity strategist at the Wells Fargo Funds Management division of San Francisco-based Wells Fargo & Co. that oversees $465 billion. Smaller investors “are reluctant to get back in until there is a clearer path, and we know that once the path is clear, it becomes a ‘greater-fool’ theory because the institutions will have already anticipated it.”
The AAII measure of pessimism peaked on July 8 at 57 percent, the most since March 5, 2009. Bullishness has averaged 29 percent during the past four weeks, compared with 45 percent who were bearish, according to the weekly survey.
Start of Rally
The last time optimism fell this low relative to pessimism was July 17, 2009, one week after the S&P 500 began a 25 percent rally, data compiled by AAII and Bloomberg show. The Chicago- based group takes answers from a few hundred people each week through its website on whether they are bullish, bearish or neutral on the stock market for the next six months, according to editor Charles Rotblut.
“Individual investors were spooked by the May 6 flash crash and they’re wondering if the stock market is a fair game,” said Dickson, chief market strategist at Great Falls, Montana-based D.A. Davidson, which oversees $25 billion. “Professionals realize there have been changes in the market to prevent a repeat of that. I don’t think that’s been communicated broadly to the retail investor.”
The May 6 selloff briefly sent the Dow Jones Industrial Average down 9.2 percent, the biggest intraday loss since 1987, before it pared the drop to 3.2 percent. A “mismatch of liquidity,” selling in exchange-traded funds that fed into stocks, and the use of market orders turned an orderly decline into a rout, a report by federal regulators said May 18.
The Securities and Exchange Commission is testing a program through December that pauses trading for 5 minutes when an S&P 500 stock rises or falls 10 percent or more in less than 5 minutes. U.S. exchanges also offered rules last month to standardize the process for canceling erroneous stock trades.
Individuals may limit gains in the S&P 500 as concerns about the economy and Europe’s debt crisis keep them out of the market, said Leo Grohowski of BNY Mellon Wealth Management. Federal Reserve Chairman Ben S. Bernanke said the economic outlook remains “unusually uncertain” in testimony to the Senate Banking Committee on July 21.
Investors have withdrawn $41.2 billion from mutual funds that hold U.S. stocks since April 2009, while piling more than $470 billion into bond funds, according to data compiled by the Washington-based Investment Company Institute. Individuals accounted for the majority of U.S. mutual fund assets in 2009, owning 84 percent, the data show.
Hedge funds that wager on both gains and losses in equities have boosted speculation shares will fall, according to Bank of America Corp. The lightly regulated private pools of capital have on average 27 percent more money in bets on rising prices than falling prices, below the historical average of 35 percent to 40 percent, based on data from the Charlotte, North Carolina- based bank.
“You’re seeing equities struggle because valuations and fundamentals look pretty good to the institutional investor, but the policy headwinds, the questions around sovereign debt, the macro concerns, are really worrying individual investors,” said Grohowski, who oversees more than $150 billion as chief investment officer at BNY Mellon Wealth Management in Boston. “There’s not one right and one wrong. We think the market is pretty reasonably valued.”
The S&P 500 trades at 15.3 times annual earnings, compared with an average of 16.5, according to data compiled by Bloomberg that dates back to 1954. The index is cheaper relative to estimated earnings for the next 12 months, with a multiple of 12, the data show.
Mutual funds, endowments, hedge funds and pensions say they’re preparing for a rally, according to Citigroup’s questionnaire from 120 respondents among those groups. Fifty- four percent said U.S. equities may gain 10 percent to 20 percent, compared with 50 percent in the previous reading.
Bill Miller, chairman and chief investment officer of Legg Mason Capital Management, said in a letter to investors last week that this is a “once-in-a-lifetime opportunity” to buy stocks of large U.S. companies. BlackRock Inc., the world’s largest asset manager, is “overweight” U.S. equities, said Bob Doll, vice chairman and chief equity strategist of the New York- based firm in a July 20 interview on Bloomberg Television’s “Morning Call with Susan Li.”
“It’s been the individual investor that’s been a good contrarian indicator,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, which oversees $50 billion in Philadelphia. “The stock market will continue to advance. It may be a grinding process, but it will continue to advance, ultimately pulling along retail investors that are notorious for buying high and selling low.”