Since reaching a bottom on 11 March, US equities have performed exceptionally well. The Nasdaq Com...
Since reaching a bottom on 11 March, US equities have performed exceptionally well. The Nasdaq Composite Index is up more than 20% year to date and returns for the Dow Jones and S&P 500 indices are also in double-digit territory.
We would not be surprised to see the market take a pause here, as it assesses the outlook for earnings in the second half of 2003 and into 2004.
After the volatility of the past three years, investors are still wary of equities but there are signs they are willing to dip a toe back in the water, particularly while returns in other asset classes are negligible.
Mutual fund flows are starting to move in the right direction. Recent industry data shows there has been a resumption of net inflows. It also appears we are on the verge of an asset shift in the US market, out of bonds and back into equities, reversing the trend of the past year.
Interest rates will stay low for the foreseeable future and bond yields are now so low investors are prepared to extend their horizons to anticipate rising dividends and capital gains on equities.
Although the economy is still sluggish and data is mixed, it is showing signs of a slow but steady move in the right direction. Fears of a double-dip recession have abated and significant stimulus being injected into the economy bodes well for a strong second half of the year.
Following the resolution of the war in Iraq, US consumer confidence has started to regain momentum. Lower oil prices have already cut the cost of motoring and the latest round of tax cuts should find their way into consumers' pockets this summer.
At the same time, lower bond yields are promoting another round of mortgage refinancing, which normally has a positive effect on consumption for several months after it occurs.
Lower mortgage rates are also helping to underpin the housing market. While personal balance sheets have been damaged over the past few years by the steep decline in the US stock market, the effect has been dampened by the continued rise in house prices.
Our forecast of 12% growth in S&P 500 operating earnings this year puts the market on a prospective earnings yield of about 6%, which compares well with 10-year Treasury bonds yielding only 3.9%.
We expect stock prices to trend upwards within a wide trading band over the rest of the year as evidence of improving economic and business fundamentals begins to rebuild investor confidence.
We remain heavy in industrial stocks, reflecting confidence the corporate sector will soon resume capital spending.
Our strategy of selective profit-taking in the energy sector continues. However, we are still emphasising our heavy rating in natural gas to reflect the stronger pricing environment we expect over the next one to two years.
We have increased our holdings in the healthcare sector, given the more accommodating environment for drug approvals from the Food and Drug Administration. Consumer staples have benefited from the decline in the dollar and we continue to take profits in this typically defensive sector.
Signs the consumer is regaining confidence.
Investors look willing to give equities a chance.
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