Investment Policy Committee -- a group of senior managers who meet weekly to oversee all investment-related activity done in S&P's name -- has decided to change its asset-allocation recommendation for investors. The committee voted on June 5 to reduce the recommended equity exposure by five percentage points, to 55%, and raise the cash allocation to 25% from 20%. The recommended bond exposure remains at 20%. This follows a similar move by the committee in April, 2002.
The committee believes that the market will be pressured lower by concerns over global tensions, potential domestic terrorism, the weakening U.S. dollar, slowing economic growth, executive indictments, and an historically unfavorable seasonal period for stocks.
In addition, equity valuations remain unjustifiably high. In the 1990s, lofty stock prices were justified by the benefits of the peace dividend, accelerating earnings growth rates, a U.S. budget surplus, and declining long-term interest rates.
But today the reverse is true. Enronitis has evolved into Tycosis, an infectious condition that spreads pessimism among investors. And until conditions improve, S&P believes it's a good idea for investors to cut back on the stock portion of their portfolios. From Standard & Poor's Investment Policy Committee