Profits made by members of the S&P 500 are rising faster than the price of the index, which is now 9% cheaper than it was in April of last year. The average price to earnings ratio (P/E) is now at 14 compared to 15.5 back in April.
However, many investors are underweight US equities right now. We are seeing the slowest post-recession growth since the 1940s combined with the best January in 15 years on the lowest trading volume since 1999. We are also seeing a record number of deposits into high grade bond funds. This lack of enthusiasm in US equities can be attributed to the fact that we did just have the best January in 15 years and we are seeing the slowest, post-recession growth since 1940s. On top of that Europe is on the verge of disaster and China is showing signs of slowing.
Obviously there is not a huge appeal for equities. There is just too much uncertainty and risk right now in the markets to warrant equities, even though they just got cheaper.
On a more positive note, corporate profits have beaten analyst’s expectations for the past 12 straight quarters. Analysts covering companies in the S&P say that earnings could rise to a record $104.27 a share. For those of you who are keeping track, that is a 69% increase since 2009, compared to just a 22% increase in the S&P over that time. Even after this rally we have had this year, the market is still undervalued, so why are investors shunning equities? “Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn,” says David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc (Yahoo Finance).
Many retail investors, as Joy stated, could still be scarred by the downturn back in 2008, where Mom and Pop investors were slaughtered. However, even if you were scarred by the downturn there is still a place to invest in the market, you just need to invest a little more conservatively. Now the problem is some investors have been on the sidelines since 2008 and have missed out on huge gains and rallies, making it that more difficult to come back into the market.
It seems as though investors are more focused on the negatives in the market, rather than the concert positives that we have. Corporate profits are rising so fast and at such a constant rate that after the rallies of 2009, 2010, and now 2012 the market is still undervalued almost 10%. I urge investors to pick up safe, reliable, value plays during this time of undervalued markets and unstable global economics.