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Forex Flash: Equity Markets still have a lot left in the Tank - Alliance Bernstein

Kurt Fuerman, leading Fund Manager at Alliance Bernstein feels that US Equity markets still have a lot of juice left in the tank.

He begins by commenting that upbeat headline alone don't make the case that US equity markets will continue ploughing ahead, however, he feels that there is plenty of evidence that 2013 could be the fifth consecutive year that investors climb “the wall of worry”. He notes that recent news is encouraging, with the S&P passing 1500, the Dow close to record highs and individual investor have started to return to the stock market.

However, he flags that there are still big picture risks to get hung up on, which has been the case for years. He writes, “ Lately, the potential drag of US fiscal austerity seems to have displaced Europe’s sovereign crisis and the China slowdown as investors’ biggest worry. But despite the preoccupations, stocks finished on positive ground in 2009, even coming off a brutal, multi year tailspin. They were up again in 2010. And in 2011. And in 2012. Four straight years of positive returns. Volatile, yes, but also up.”

He hears lots of chatter that that stocks must be getting tired of climbing by now, and it´s time for the market to take a rest, or a fail. However, he comments that when we cut through the emotion to look at the fundamentals, he sees promising signs that equity markets have a lot left in the tank. Home prices have been rising and new home activity has been improving. Rising home prices can be a big boon to consumer confidence by shoring up their net worth. He adds that it is a shot in the arm for banks too, and improving new home construction should help support more job growth.

Feuerman writes, “The run-up in the euro in the second half of 2012 has helped, too, bolstering US corporate earnings. That’s because multinational companies with substantial overseas operations are able to translate non-US earnings back into US dollars at a more favorable rate.” Further he notes that corporate earnings have been at record levels, and are still growing. He feels that EPS for the S&P 500 Index should check in at about $103 for 2012—a new high. Dividends, in terms of total dollars paid out, are also at an all-time high, and look to be growing faster than earnings. Also, the dividend yield on stocks still stacks up well against bonds. And there’s the upside potential.

He continues to write, “Based on our assessment, equity valuations still look like a good deal—even after an impressive four-year rally. As of late February, as seen in the display below, the S&P 500 was trading at a price-earnings (P/E) ratio of about 14 times. Compare that with the yield of about 2% on the 10-year Treasury bond, which works out to an “earnings” multiple of roughly 50 times.”

He thinks that investors will increasingly see this as evidence of a good opportunity to return to equities and there have been signs of money in motion. In January 2013, investors put more than $20bln into US stock funds, and although that hardly offsets the huge outflows in previous years, it’s still a promising sign. In his opinion, more institutions could also up their equity allocations after cutting them to well under 50% over the past decade. All told, he finishes by commenting that these factors seem to make the case for investors maintaining a strong foothold on their way up the wall of worry in 2013. He writes, “It may not be a straight path, as we’ve seen with some of the recent market swings, but we’re pretty confident they’ll keep climbing.”

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