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Tags: S&P | Valuation | index | 2011

S&P 500 Valuation Slips 19% Below 2011 as Shaoul Advises Patience

Monday, 04 June 2012 08:38 AM EDT

The weakest U.S. hiring in 12 months erased the Dow Jones Industrial Average’s advance for 2012 and pushed valuations in the Standard & Poor’s 500 Index 19 percent below last year’s level.

The increase in the American jobless rate to 8.2 percent in May compounded signs that the economic recovery is stalling and sent the benchmark gauge for U.S. equities down 2.5 percent to 1,278.04 on June 1, almost 37 points below its level a year earlier. The S&P 500 is trading at 12.9 times profits in the last 12 months, compared with 15.9 times in February 2011, data compiled by Bloomberg show.

For bears, the decline in valuations shows the weakest recovery from any recession in seven decades has exhausted buyers and signals investors expect the economy to slow further. Bulls say buying when payroll gains slow has made money in the past and that record earnings will support share prices as the Federal Reserve holds rates near zero.

“You have to take your hits,” said Michael Shaoul, chairman of Marketfield Asset Management in New York, whose biggest fund oversees $1.6 billion and beat 98 percent of its peers in the last year, according to data compiled by Bloomberg. “You don’t let it change your mind about domestic U.S. activity. You can be patient with U.S. economic growth and the market, and I still keep that view after this.”

Shaoul said he’s buying stocks of U.S. companies that depend least on overseas revenue. He’s selling short emerging markets, expecting further losses after the MSCI Emerging Market Index of companies in 21 less-developed countries fell 17 percent since reaching a seven-month high on March 2.

Biggest Decline

The S&P 500 posted its biggest decline since November on June 1 after the Labor Department said payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg News survey of 87 economists. The unemployment rate increased to 8.2 percent from 8.1 percent in April. The slump in stocks followed a 6.3 percent loss in May, the biggest monthly tumble since September.

More than $1.63 trillion has been erased from U.S. equity values and $5.92 trillion from world stocks this quarter as concern Greece will leave the euro and slowing Chinese manufacturing pushed government bond yields in the U.S. and Germany to record lows.

China’s Purchasing Managers’ Index dropped to 50.4 in May from 53.3 in April, the statistics bureau and logistics federation said June 1 in Beijing. German two-year note yields fell below zero for the first time and the euro weakened to $1.2288, a level not seen since July 2010.

Economic Surprise

A Citigroup Inc. index that plots results of American economic reports against average forecasts in Bloomberg surveys has gone from 91.9 in January to minus 53.6.

At 12.9, the S&P 500’s price-earnings ratio is 21 percent below its five-decade average of 16.4. It fell below the long- term level in May 2010 and the stretch of more than 500 trading days since then is the longest such period since the presidency of Richard Nixon in the 1970s, data compiled by Bloomberg show.

While the jobless data shifted investor focus to the U.S. after Greece and Spain dominated markets since April, the hiring shortfall means little for profits of American companies, according to Shaoul and Brian Barish, president and chief investment officer of Cambiar Investors LLC, a Denver-based institutional equities manager with $8 billion under management.

“I feel like a hostage,” Barish, who has been adding to equity positions, said in an e-mail on June 1. “I seriously do not believe the world will end in 2012, and, heck, we are still generating some jobs. But risk aversion is astronomical and that’s just how things are.”

Record Earnings

Earnings in the S&P 500 are forecast to reach a record $105.81 a share in 2012 and climb 13 percent in 2013, according to analyst estimates compiled by Bloomberg. Companies in the index have boosted profits for more than two years. Since the start of 2010, non-farm payrolls have declined by as much as 136,000 and increased as much as 677,000, according to quarterly data compiled by Bloomberg.

Data on jobs followed a Commerce Department report in which the government lowered its estimate of expansion in first- quarter gross domestic product to 1.9 percent from 2.2 percent. Americans signing contracts to buy previously owned homes fell in April by the most in a year and companies placed fewer orders for computers and other capital equipment, reports showed since May 24.

The S&P 500 has declined 9.9 percent since reaching a four- year high of 1,419.04 on April 2, trimming its advance since last year’s low on Oct. 3 to 16 percent. That compares with a 14 percent drop in the Stoxx Europe 600 Index since its 2012 peak, a retreat that cut the advance since its low of 214.89 in September to 9.4 percent.

Changing Tone

“The data is just not supporting the view that the U.S. is going to be a strong spot in the world,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a June 1 phone interview. His firm oversees $160 billion and favors larger U.S. companies over emerging markets and European equities. “It’s hard to see what’s going to change the tone of this market right now.”

GDP has expanded an average of 2.4 percent a quarter since the recession ended in June 2009, about half the average rate in recoveries since World War II, according to data compiled by the Commerce Department and Bloomberg. The growth rate is the smallest for any of those periods, the data show.

Trend and sentiment indicators used by analysts who base investment decisions on price and volume charts are deteriorating. The S&P 500 slipped below its average price in the previous 200 days on June 1 for the first time since December. The proportion of newsletter writers who are bearish on equities rose to a two-month high of 26.6 percent in May, according to Investors Intelligence, a New Rochelle, New York- based research firm.

VIX Surges

The Chicago Board Options Exchange Volatility, a gauge known as the VIX that measures the amount investors are paying for protection from S&P 500 losses, ended last week at a six- month high of 26.66.

Investors have pulled money from U.S. equity funds every month since April 2011, the longest streak of outflows since Washington-based trade group Investment Company Institute began tracking the data in 1984. They took out $7.2 billion during the five days ended May 23 after $178 billion of withdrawals in the previous 12 months, ICI data show.

Withdrawals came as the S&P 500 has declined 16 percent in the 12 years since the Internet bubble of the 1990s peaked on March 24, 2000. Including dividends, the index has returned 0.4 percent a year since then, compared with 19.1 percent annually in the previous decade, data compiled by Bloomberg show.

Volume Slows

An average of 6.82 billion shares have traded daily in the U.S. this year, compared with 7.8 billion in 2011 and 8.52 billion in 2010, according to data compiled by Bloomberg on exchange-listed securities. The decline shows that profit growth and shrinking price-earnings ratios are unlikely to rescue equities, according to Jon Fisher, a fund manager at Fifth Third Asset Management in Minneapolis, which oversees about $16 billion.

“I don’t think valuation is support or catalyst for the market,” Fisher said in a June 1 telephone interview. “We’ve been on a trend for a number of years for multiple contractions. There is apathy toward stocks. There is a lack of trust.”

Fifth Third recently purchased shares of Tractor Supply Co., the Brentwood, Tennessee-based owner of farm-equipment stores, and Northfield, Illinois-based Kraft Foods Inc., the foodmaker splitting in two this year.

Buying Opportunity

Buying shares the day after the weakest payroll reports in each of the last three years has been a profitable strategy. The S&P 500 is up 51 percent since 818,000 jobs were cut in January 2009 and 24 percent since 167,000 were eliminated in June 2010, according to data compiled by Bloomberg. The index gained 8.1 percent between June 2, 2011, and its peak 10 months later, though the selloff has left it down 2.7 percent, the data show.

Central bankers in the U.S. and Europe took steps in the past three years to boost economic growth when conditions deteriorated. The Fed carried out two rounds of so-called quantitative easing since Lehman Brothers Holdings Inc. collapsed in 2008, buying $2.3 trillion in bonds to spur inflation. Minutes from the Fed’s April meeting showed that several members believe more stimulus could be necessary “if the economic recovery lost momentum.”

Policy makers will consider joining Boston Fed President Eric Rosengren’s call for renewed stimulus when they meet June 19 and 20. Rosengren said June 1 that the Fed should further its full-employment mandate and extend beyond June a program known as Operation Twist, which lengthens the average duration of bonds on its balance sheet.

Expansion Forecasts

Last year’s selloff in U.S. equity markets coincided with a decline in forecasts for 2012 GDP growth from 3.15 percent at the start of the year to 2 percent in October, according to surveys of economists by Bloomberg. The world’s largest economy will grow 2.3 percent this year, according to the median estimate of 74 economists surveyed by Bloomberg.

“That’s good,” Jeffrey Coons, president of Manning & Napier Advisors Inc. in Fairport, New York, said in an interview at Bloomberg LP’s New York office on June 1. His firm manages $44 billion. “It means we don’t have to worry about that ratcheting down of growth expectations. That should help to keep a floor on stock prices.”

© Copyright 2023 Bloomberg News. All rights reserved.

Monday, 04 June 2012 08:38 AM
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