Equities expected to rebound in ’09
Bloomberg
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There’s more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for U.S. stocks since the Great Depression.The $8.85 trillion held in cash, bank deposits and money-market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg.
Leuthold, Invesco Aim Advisors, Hennessy Advisors and BlackRock, which together oversee almost $1.7 trillion, say that’s a sign the Standard & Poor’s 500 Index will rise after $1 trillion in credit losses sent the benchmark index for American equities to the biggest annual drop since 1931. The eight previous times that cash peaked compared with the market’s capitalization the S&P 500 rose an average 24 percent in six months.
"There is a store of cash out there that is able to take the market higher," said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. "The same dollar you had last year buys you twice as much S&P 500 as it did a year ago."
Leuthold Group said in its December bulletin to investors that stocks offer "one of the great buying opportunities of your lifetime."
November’s rise
The S&P 500 rose 16 percent from an 11-year low on Nov. 20 as the government rescued Citigroup, President-elect Barack Obama pledged to stimulate growth with the biggest infrastructure investment since the 1950s, and the Fed cut interest rates to as low as zero percent.
The ratio of cash on hand to U.S. market capitalization jumped 86 percent in the first 11 months of the year, the biggest rise since the Fed began keeping records in 1959, as the U.S., Europe and Japan fell into the first simultaneous recessions since World War II. So-called money of zero maturity, the central bank’s measure of U.S. assets available for immediate spending, is mostly held by households, according to Richard G. Anderson, economist at the Federal Reserve Bank of St. Louis.
"What the cash pile on the sidelines represents is dry powder," said Fritz Meyer, the Denver-based senior market strategist at Invesco Aim, which manages about $358 billion. "Recovery in the second half of the year will probably play out."
Any recovery will depend on a rebound in corporate profits and the economy after $30 trillion was wiped out from world equities this year, according to Frederic Dickson, chief market strategist at D.A. Davidson & Co.
Jobless claims reached a 26-year high this month, while economists surveyed by Bloomberg estimate household spending will fall 1 percent next year, the most since the aftermath of the attack on Pearl Harbor. A 13 percent slump in the median home resale price in November from a year earlier was likely the largest since the 1930s, the National Association of Realtors said last week, damping speculation the housing market is close to a bottom.
Analysts estimate profits at S&P 500 companies will shrink 10.3 percent in the first three months of 2009 and 5.8 percent in the second quarter, bringing the stretch of earnings declines to a record eight quarters, Bloomberg data show. Gross domestic product will contract in the first half of the year before growth resumes in the third quarter, according to a Bloomberg survey.
Firing the biggest cannon
"The fuel supply is there, but people have to have a reason to use it," said Dickson, who helps oversee about $19 billion. "The Fed fired the shot out of the biggest cannon they know. The question is, will it hit the right mark?"
This year’s slump has left S&P 500 companies valued at an average of 12.6 times operating profit, the cheapest since at least 1998, monthly data compiled by Bloomberg show.
Cash in interest-bearing checking accounts at U.S. banks earns less than 0.1 percent annually, minus inflation, according to data compiled by Bankrate.com. Ten-year Treasury notes yield 1.03 percent after adjusting for the cost of living, and yields fell to the lowest level on record this month.
The last time cash accounted for a larger proportion of market value was 1990. The ratio peaked at 75 percent in October that year, after the savings and loan industry collapsed, Drexel Burnham Lambert bankrupted and the U.S. fell into a recession. The S&P 500 rallied 23 percent in six months and almost 30 percent in a year.