Markets in a Nutshell
August 2, 2010 Issue
Stocks closed out July on a high note, finishing with their best month in a year. The Dow was up 7.1% in July, the S&P 500 6.9% and the Nasdaq 6.9%. For the year the Dow is up 0.4%, the S&P 500 down 1.2% and the Nasdaq down 0.6%. Bonds continue to gain with the Barclays Aggregate Bond index now up 6.9% for 2010.
“Are Bonds Expensive? Stocks Cheap? Both?” This from the Wall Street Journal (7/31/8/1). The article explains that the earnings yield on the S&P 500 stock index (the earnings yield- different from the dividend yield- tries to measure how much cash a company generates for investors relative to its stock price) is 6.6% currently. With 10 year Treasury interest rates at 2.9%, the gap between the earnings yield and bond interest rates are at the highest level in 30 years (6.6% - 2.9% = 3.7%). So what does this mean? Read on..
Based on history, either stocks are cheap, bonds expensive or a little of both. One note that was also mentioned in the article (which we would agree with) is that what we are experiencing right now is not the typical cycle. The deleveraging (reducing debt) taking place in the economy is something that hasn’t’ happened since the 1930’s and takes a while to itself through. So we could see bonds continue to be attractive for many investors even though stocks may be relatively cheap. So again, for older investors, caution in stocks may be warranted (not putting all eggs in one basket). For younger investors, now (as well as the next few years) presents an opportunity to accumulate stocks relatively cheaply.
The U.S. economy grew at a 2.4% annualized pace during the 2nd quarter (its 4th consecutive quarterly advance) according to the Commerce Dept. While this pace is below the typical post recessionary recovery numbers (normally 6-8% growth), we have come a ways from the -6% “growth” in 2nd quarter 2009.
As noted above, stocks posted big gains in July. This was, as is many times typical, on the heels of investors taking money out of stocks prior to (and sometimes during) the rise (and often we see stocks fall after big money goes into stocks). According to the Investment Company Institute $5 billion was net withdrawn from stock funds in June and preliminarily about $9.3 billion in July.