total value of us stock market
With so much negative news dominating the headlines, investors can't be blamed for being worried or shying away from stocks. But if you take closer look at the market - specifically the Standard & Poor's 500 index - you might be surprised by what you see.
The S&P 500 is down just 3% year-to-date, and is actually up more than 5% over the past three months. The indexes for China, India, and Brazil, on the other hand, are all down over the past three months. Brazil's market index is down 19% year-to-date, China's is down more than 21% and India's is down more than 24%.
"People don't understand that the S&P 500 has now outperformed the BRIC nations (Brazil, Russia, India and China) for four years," Richard Bernstein, CEO and chief investment officer for Richard Bernstein Advisors, told USA Today. "We are in the very early stages of a resurgence of the U.S. equity markets, and I don't think people are aware of the shift that is going on."
Indeed, many analysts actually think U.S. stocks are cheap right now.
The price/earnings (P/E) ratio for the S&P 500 dropped to 12.8 as of the third quarter of 2011. The historical average for the S&P's P/E is 15, meaning stocks are moderately underpriced.
In fact, the average P/E has been even higher in recent decades. Since 1988 the S&P average P/E has been 19.2 - which translates to a 33% discount for current stock prices.
Four Reasons for a RallyCorporate America has quietly been rebuilding since the financial crisis of 2008, but the constant barrage of bad news - the multiple disasters in Japan in March, budget battles in Washington, concern over the Eurozone debt crisis - has camouflaged much the progress that's been made.
"The pessimism today is actually creating opportunities for investors," Kate Warne, chief investment strategist at Edward Jones, told USA Today. "There are a lot of short-term concerns, a lot of serious risks, but investors really need to keep their eyes on the horizon, because we are also seeing strong fundamentals. And that is what is driving the market longer term."
Analysts have identified several positive signs - in addition to the relatively low S&P 500 P/E ratio - that indicate U.S. stocks are stronger heading into 2012 than many realize:
- Cheaper commodities: The prices for commodities have fallen significantly since the first half of 2011, which should give corporate earnings a boost at least through the first couple of quarters of next year.
- Lean and Mean: The fiscal discipline dictated by the financial crisis of 2008 has helped many companies weather the troubles of 2011. And now many companies are poised to quickly grow profits as soon as worries ease.
- Dividend Increases: Companies that pay dividends have been increasing them, and that should continue. Despite the increases, the overall payout ratio has dipped to 29% from a 50-year average of 45%. Higher dividends mean a higher total return for investors, and provide some insurance against downturns.
- More Buybacks: Buyback activity among U.S. companies rose to $439 billion in 2011 and is expected to rise to $500 billion next year. That sort of money flowing into the stock market helps boost prices.
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Don't Let Uncertainty Scare You Out of the U.S. Stock Market
Compared to its foreign counterparts, the U.S. stock market is one of the best performers this year - even though some nervous investors may find that hard to believe.
The Standard & Poor's 500 Index is basically flat so far this year, but that's a far better performance than the double-digit losses in other markets.
The French and German stock markets are down about 18% and 21%, respectively. Japan has plummeted nearly 15% in the aftermath of the crippling earthquake and tsunami, and China's Shanghai Composite Index has plunged about 17%.
Even emerging markets, where growth is not as stunted as some major developed economies, have struggled. India's index is down about 18%, and Brazil's 16%.
"The U.S. is the best house in a bad neighborhood," James Dailey, manager of the TEAM Asset Strategy Fund, told CNN. "A lot of it has to do with the policy decisions and politics around the world and that's very discomforting."
A major factor in weak market performance has been the Eurozone debt crisis. The lack of resolution has been rattling investor nerves for months, and will not go away in the New Year.
"The real structural problems facing Europe are going to require wholesale lifestyle changes that won't get done in a year or two," said Money Morning Capital Waves Strategist Shah Gilani. "European Central Bank meddling will only serve to extend the problem while they pretend things will sort themselves out."
Another year of Europe's problems plaguing economies has created a market environment filled with too much uncertainty for many investors to be comfortable.
"That's led to a lot of paralysis," said TEAM fund's Dailey. "Investors are walking away from stocks and raising cash."
A weak U.S. economic outlook for 2012 is also steering investors away from markets.
The Organization for Economic Cooperation and Development (OECD) estimates U.S. growth will slow to 2% next year, down from a 3.1% estimate in May. Of course, these forecasts are contingent upon Congress finding a way to stimulate the economy and tighten fiscal policy - not an easy balance to achieve. Without such action, U.S. economic growth next year could be as slim as 0.3%, and only hit 1.3% in 2013.
What investors need to know despite this dismal forecast is that the lack of growth does not mean a lack of profit opportunities. There are still investments that will boost your portfolio - if you know where to look.
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