Bloomberg News

Stocks Show U.S. Better Off With S&P 500 Cheap to World

September 17, 2012

Stocks Showing Americans Better Off With S&P 500 Cheap to World

The S&P 500 has risen 17 percent this year, led by gains exceeding 92 percent in PulteGroup Inc., Sprint Nextel Corp. and Expedia Inc. Photographer: Victor J. Blue/Bloomberg

As politicians debate whether Americans are better off than they were four years ago, the stock market is saying yes.

With 50 days before the national election, the Standard & Poor’s 500 Index has rallied 82 percent to a four-year high since President Barack Obama took office. The advance puts the gauge 6.8 percent from its record, closer to the all-time high than any of the world’s biggest stock markets, data compiled by Bloomberg show. The benchmark index of American equity is trading at 14.9 times reported earnings (SPX), the biggest discount to MSCI’s global measure since March 2010.

While bears say the index has risen too far, too fast given U.S. unemployment has remained above 8 percent for 43 straight months, bulls point to record earnings forecasts as evidence the economy and stocks have room to improve. Jim Chanos, who oversees about $6 billion at Kynikos Associates and profits from betting against individual stocks, says America is doing better. Goldman Sachs Group Inc.’s Abby Joseph Cohen says the firm’s “most thoughtful” clients are growing more confident.

“We are in a healthier state right now,” Chris Hyzy, who helps oversee about $325 billion as chief investment officer of U.S. Trust in New York, said in a Sept. 12 phone interview. “Next year, we think the growth clip in the United States and the globe is going to be better than expected. Over the next three years, we are bullish.”

Faster Growth

Jeffrey Gundlach, who oversees $40 billion as chief executive officer of Los Angeles-based DoubleLine Capital LP, said last week that stocks won’t repeat the poor performance they had from 2000 to 2010, when the benchmark index tumbled 14 percent. He has shifted from his pessimistic views in October 2009, when he said a 61 percent gain in the S&P 500 following the 57 percent rout during the financial crisis wouldn’t last.

While economists predict slowing U.S. growth next year, equities are pricing in a faster expansion, if election-year history is any guide. Every time the S&P 500 posted an annual return above its historical average, U.S. gross domestic product has accelerated the following year, according to data compiled by Bloomberg of the eight elections since 1948 when an American presidential incumbent was seeking a second term.

The S&P 500 has risen 17 percent this year, led by gains exceeding 92 percent in PulteGroup Inc., Sprint Nextel Corp. and Expedia Inc. The advance in the U.S. equity benchmark is 5.1 percentage points more than the election year average, data compiled by Bloomberg show.

Fed Stimulus

The gauge advanced 1.9 percent to 1,465.77 last week after the Federal Reserve said it will buy mortgage-backed securities in a third round of quantitative easing stimulus. Futures on the S&P 500 declined 0.2 percent at 8:27 a.m. in London today.

Mitt Romney, the Republican presidential candidate, is making the economy the central issue for the November election by using Ronald Reagan’s 1980 campaign question, “Are you better off than you were four years ago?”

Republicans say the president hasn’t created enough jobs and that his fiscal policies have failed after the U.S. government’s public debt topped $16 trillion. Economists forecast U.S. growth at 2.2 percent this year and 2.1 percent the next, based on estimates from 98 forecasts compiled by Bloomberg.

Democrats point to the automotive industry’s recovery as evidence Obama’s policies sparked growth. They cite an improving job market during the last four years, with 96,000 jobs added last month, compared to 818,000 lost in January 2009.

Great Depression

Obama inherited the worst financial crisis since the Great Depression when he took office in January 2009. The S&P 500’s 82 percent gain since then is the biggest first-term rally for any president since Dwight D. Eisenhower from 1953 to 1956, data compiled by Bloomberg show.

White House spokeswoman Amy Brundage and Obama campaign spokesman Ben LaBolt declined to comment.

“There are a lot of economic indicators that signal the health of the economy -- from our record-high debt, unprecedented credit downgrade, stalled employment numbers, and the record number of people on food stamps and in poverty, all signs point to the fact that we are heading in the wrong direction,” said Romney campaign spokeswoman Andrea Saul. “Mitt Romney has a plan to strengthen the middle class and get Americans working again.”

Unemployment Rate

The S&P 500 has never stayed above 1,400 when the unemployment rate was this high. The first time the equity index reached that level was in 1999, when the unemployment rate was at 3.8 percent, the lowest in more than 30 years. As the gauge climbed to a record 1,565.15 in 2007, joblessness was still below 5 percent.

“It’s too much of a stretch right now to say that we’re better off than we were in 2008,” Ryan Larson, the Chicago- based head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., said in a Sept. 12 phone interview. His firm oversees $250 billion in assets. “A lot of problems here in the United States and abroad remain and while we’re at multi-year highs, those multi-year highs have come largely driven from stimulus accommodation from central banks.”

The Fed said last week that it plans to keep interest rates “exceptionally low” through the middle of 2015 after holding the benchmark borrowing rate at near zero since December 2008. It introduced two previous rounds of bond purchases totaling $2.3 trillion in an attempt to revive the economy and boost asset prices.

Forecasting Mechanism

“Global capital markets are the world’s biggest forecasting mechanism,” Stephen Wood, the New York-based chief market strategist for North America for Russell Investments, said in a phone interview. His firm oversees $152 billion. “A significant portion of the recent rally in equity markets has been in anticipation of an aggressive monetary response by central banks globally.”

When asked how they felt about their circumstances compared with the start of the Obama administration, 45 percent of Americans said “better off” versus 36 percent for “worse off,” according to a Bloomberg National Poll taken June 15-18. The rest said their circumstances were about the same or they weren’t sure.

Four years ago, the S&P 500 was tumbling in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy filing and the government bailout of American International Group Inc. It reached a low of 676.53 on March 9, 2009, and the economy contracted 3.1 percent that year, the most since 1946.

Retirement Funds

Americans have recovered from losses in their retirement funds during the bear market. The average 401(k) balance rose to $72,800 in the second quarter from $62,400 in 2008, according to data from Boston-based Fidelity Investments.

“Our economy and our banking system are in better shape than others,” Chanos said last week in an interview at Bloomberg’s headquarters in New York. “I suspect that the surprises will probably be on the positive side in the U.S. market.”

U.S. stocks are in the fourth year of a bull market that has more than doubled the value of the S&P 500. Earnings in the index have increased for the past 11 quarters, with more than 71 percent exceeding analyst projections for the three months through June 30, and are forecast to reach a record $103.53 a share in 2012, according to analysts’ estimates compiled by Bloomberg.

Chanos, who is based in New York, cited a recovery in the U.S. housing market and improving auto sales as evidence of the strengthening economy. An index of pending home resales exceeded the median forecast in July, rising to the highest level since April 2010. U.S. auto sales in August beat analysts’ estimates and put the automakers on a pace to exceed 14 million vehicles this year, the best performance since 2007.

Investor Confidence

“When I take a look at markets, the economy measured in lots of different ways and so on, I think we’re dramatically better off than we were,” Cohen, the senior U.S. investment strategist at Goldman Sachs, said in an interview at Bloomberg’s headquarters in New York last week. “The market is telling me that investors are generally confident that we’re on the right path.”

Rising profits have kept equity valuations below the historic average. The S&P 500’s price-earnings ratio of 14.9 is 9.1 percent below the five-decade mean, data compiled by Bloomberg show. The last two times U.S. equities were this inexpensive compared with global stocks, in 2003 and 2009, gains in the S&P 500 lasted for at least three years.

DoubleLine Capital’s Gundlach, who correctly called an end to the five-year property boom and said falling real-estate prices would weaken the U.S. economy, said last week that he’s considering adding equity funds to the bond lineup at his firm.

“Equities may be challenged in the near term,” Gundlach said last week at the Bloomberg Markets 50 Summit in New York. “But I doubt you’re going to have this lost decade or lost 15 years of equities again.”

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net


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