The stock market achieved a monumental milestone in reaching a
new high in the first quarter. While many are skeptical about how
much higher it could go, stocks are trading at cheaper valuations
than at prior peaks. Investment strategists see many reasons for
the market to power higher for as long as eight more years.
SPDR S&P 500 (
), the largest ETF by assets, rallied 10.5% the first three
months of the year to 156.67, a new all-time closing high and
just a hair below its historic October 2007 intraday high at
157.52. The stock market has rallied an eye-popping 132% from its
March 2009 low after crashing 57% in the 2007-09 bear market.
On an inflation-adjusted basis, the S&P 500 is still 10%
below its 2007 peak, but the difference has been made up by the
dividends, says Jeremy Siegel, an investment strategist at
WisdomTree Investments and WisdomTree Asset Management. S&P
500 companies earned $88.45 a share in the past 12 months vs.
$84.92 at the peak of 2007, he wrote in a client note.
Earnings would be far higher had many companies not taken
large hits against their pension funds in Q4 when interest rates
plunged to all-time lows, Siegel says.
Today's valuations are a far cry from the S&P's 2000 high,
when it earned $50.95 a share. "Over the past 13 years there has
been a 30% nominal return (including dividends), but a 36%
cumulative inflation." So the S&P trades well below its March
2000 peak in real terms even when including dividends.
In addition, interest rates were far higher at prior market
peaks, so competition from fixed-income assets was far greater.
The 10-year Treasury bonds yielded more than 6% in 2000 and 5% in
2007. They currently yield 1.87%.
No Ceiling In Sight
"Although we have returned to historic highs, those don't
represent ceilings," Tony Coffey, a portfolio manager for three
mutual funds at Franklin Templeton Investments, wrote in an
email. "Historically, when the market has reached previous cycle
highs, it has tended to go even higher for quite a while before
Coffey, who overseas $27.5 billion in assets, anticipates a
correction in the second half of the year. But he expects the
market to outperform bonds thanks to the Federal Reserve's easy
policy, the housing market rebound, improved consumer confidence
and reasonable valuations.
What's more, an appreciating U.S. dollar has helped control
inflation and the earnings yield on the S&P 500 is
historically high compared with the 10-year Treasury bond yields.
Coffey favors U.S. stocks over foreign, especially Europe,
because of the Continent's slow economic growth and poor
management of its credit crisis.
"The historical record shows that equity markets are more
likely to pause around these levels, pull back, or trade in a
long sideways range before continuing higher," Waverly Advisors
wrote in a client note Monday. Chart patterns and price action
suggest a five- to eight-year bull market from current levels
could arise, the firm believes.
Investors should look at any pullbacks or corrections as
long-term buying opportunities because investment risks are much
lower than in the fall of 2011 during the Greek credit crisis,
says Randy Frederick, managing director of active trading and
derivatives at Charles Schwab. The U.S. economy is much stronger
than it was back then and the Cyprus banking crisis has been
contained, Frederick added.
IShares MSCI EAFE Index (
), tracking developed foreign markets, rose 3.73% in the first
quarter as Japan's outperformance offset European losses.IShares
MSCI Emerging Markets (
) lagged developed markets and the U.S. with a 3.56% loss.
Both EFA and EEM have yet to regain their 2011 highs and trade
deep below their 2007 peaks, presenting a possible "catch up"
trade in which traders sell their winners to buy the laggards to
take advantage of lower valuations.