Is it too late to jump in? Martin Mauro Fixed Income Strategist Cheryl Rowan Portfolio Strategist It may be riskier to stay out Both the S&P 500 and the Dow recently have surpassed their all time peaks, before receding on weak economic data. Chart 1 shows that the market headed south after the last two peaks in the S&P 500 index, reached in March 2000 and October 2007, and both at about today’s levels. Many investors are wary of committing to the market now, because of the risk that the market will head down again. We do not expect history will repeat this time. By many important metrics, the stock market is far from the overextended levels that prevailed at the prior peaks. Today, earnings are better, dividend yields are higher, and both leverage ratios and P/E ratios are lower, in most cases by appreciable amounts. What’s more, bonds and cash offer much less competition. The yields on both the 10-year Treasury note and cash are percentage points below where they were at the other two market peaks. We illustrate that in Table 1, which comes from Savita Subramanian, US Equity and Quantitative Strategist. The Table compares where key market measures stand now versus at the two prior peaks in the S&P 500 index. Source: BofA Merrill Lynch US Equity & Quant Strategy, I/B/E/S, Bureau of Labor Statistics A weakening in economic growth is one of the clear risks for equities, but we note that expectations of global economic growth do not appear to be a major driver of the market’s recent advance. Defensive sectors – health care, consumer staples, and utilities – are doing best. More cyclical sectors – energy, technology, and materials – rank at the bottom, suggesting that a healthy layer of caution still prevails in the market. Table 2 to the left ranks the YTD performance of different sectors of the stock market. |