By John Wasik
CHICAGO, May 29 (Reuters) - 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 happened.”
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 July.
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.”
It’s always difficult to gauge market sentiment going forward, but consider these five trends if you want to gain some perspective:
* 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 rebounding.
* 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.