By John Wasik
CHICAGO May 29 With the S&P 500 Index up more
than 16 percent this year and health care, its top sector index,
up 24 percent, it seems counterintuitive that so many investors
are clinging to the low single-digit returns in bonds.
Money certainly isn't gushing into stock mutual funds, even
though the Dow Jones industrial average and the Standard
& Poor's 500 Index have hit a series of record highs.
Between April 24 and May 1, investors pulled more than $4
billion out of U.S. equities while pumping almost $1 billion
into bonds, according to the Investment Company Institute, the
trade group for mutual funds, exchange-traded funds and other
U.S. investment companies. The following week, more than $7.3
billion was invested in bond funds, compared with only $363
million in U.S. stocks.
Tracey Ryniec, stock strategist at Zacks Investment
Research, says "even professional managers are skeptical. The
'great rotation' (from bonds into stocks) never really
Yet optimism continues to emanate from analysts, especially
those like Ryniec who don't think the market is overpriced.
Ryniec sees skepticism as a bullish indicator for stocks,
mostly because stock valuations don't seem to be excessive. With
stocks trading around 15 times earnings, they have a ways to go
before they hit her "danger zone" in the 20s and above.
"The overall market is attractively priced," Ryniec says.
Seth Masters, chief investment officer of Bernstein Global
Wealth Management, sees the Dow at 20,000 within five years
(it's around 15,400 now). He initially made that forecast last
Masters says stocks are still reasonably priced because S&P
500 companies have low debt-equity ratios and improving economic
prospects will continue to boost earnings. Most of the investors
who are still pouring money into low-yielding bonds are "paying
for the privilege of safety," as he points out.
"Stocks are not that risky right now," Masters says, noting
that volatility is at normal levels. "They've been remarkably
well behaved over the past year."
POSITIVE SIGNS FOR STOCKS
It's always difficult to gauge market sentiment going
forward, but consider these five trends if you want to gain some
* Euro-zone debt woes have managed to stay off the front
business pages of late. While it's hard to make a case that
austerity measures are easing unemployment in the hardest-hit
countries - the opposite appears to be true - it's less likely
that the euro zone will collapse. On Monday and Tuesday, central
bankers from around the globe gave statements that they will
continue stimulative economic policies.
* Japanese stocks, the Charlie Browns of international
equities, are poised to rally further as the country's central
bank pursues a weak-yen policy. The Nikkei average hit a
5-1/2 year high on May 20 as Japan's economy appeared to be
* Gold prices continue to decline. The precious metal has
traditionally moved in the opposite direction of stock averages.
Gold is down more than 17 percent this year as widespread
pessimism about the U.S. economy has abated.
* Washington's debt battles have eased. Sequestered budget
cuts, combined with economic revival, have pared the U.S.
federal deficit. The Congressional Budget Office reported last
week that U.S. borrowing will stabilize over the next decade,
alleviating some fears that the national debt will overwhelm the
government, which received $1.6 trillion in tax receipts in the
first four months of the year - a record high for that period.
* Consumer sentiment is strong and cash registers are
ringing. A survey by Thomson Reuters/University of Michigan
showed that consumer sentiment was at its highest level in
nearly six years in early May. That's good for retailers,
producers of durable and discretionary goods, technology,
utilities and energy companies. Another indicator - the U.S.
consumer confidence index - climbed in May to the highest level
in more than five years, according to the Conference Board, a
private research group.
Keeping your skepticism close at hand isn't a bad idea, but
tilting too far in one direction away from your portfolio
objectives can hurt you.
I won't discount the fact that there are still wild cards
out there and they may come from Europe, China or the Middle
East. The Federal Reserve will eventually back off its easing
and cheap money policies, which could trigger a rise in interest
rates. That will punish bond fund holders.
In the interim, if you can handle the risk, it makes little
sense to "fight the Fed" and avoid stocks.