Is it too late to jump in?

Martin Mauro
Fixed Income Strategist

Cheryl Rowan
Portfolio Strategist

It may be riskier to stay out

Both the S&P 500 and the Dow recently have surpassed their all time peaks,
before receding on weak economic data. Chart 1 shows that the market headed
south after the last two peaks in the S&P 500 index, reached in March 2000 and
October 2007, and both at about today’s levels. Many investors are wary of
committing to the market now, because of the risk that the market will head down
again. We do not expect history will repeat this time.
By many important metrics, the stock market is far from the overextended levels
that prevailed at the prior peaks. Today, earnings are better, dividend yields are
higher, and both leverage ratios and P/E ratios are lower, in most cases by
appreciable

amounts. What’s more, bonds and cash offer much less competition.
The yields on both the 10-year Treasury note and cash are percentage points
below where they were at the other two market peaks. We illustrate that in Table
1, which comes from Savita Subramanian, US Equity and Quantitative Strategist.
The Table compares where key market measures stand now versus at the two
prior peaks in the S&P 500 index.

Source: BofA Merrill Lynch US Equity & Quant Strategy, I/B/E/S, Bureau of Labor Statistics
A weakening in economic growth is one of the clear risks for equities, but we note
that expectations of global economic growth do not appear to be a major driver of
the market’s recent advance. Defensive sectors – health care, consumer staples,
and utilities – are doing best. More cyclical sectors – energy, technology, and
materials – rank at the bottom, suggesting that a healthy layer of caution still
prevails in the market. Table 2 to the left ranks the YTD performance of different
sectors of the stock market.