FYI | Dec 14 2010
By BTIG chief market strategist Mike O'Rourke
US Equity markets slowly ground higher to another round of recovery highs. Conspicuously absent is the Dow Industrials, which still needs to advance 36 basis points to surpass its November 11th peak. Its Dow Theory counterpart, the Transports, settled just shy of its recovery highs registered earlier in the week. The S&P 500 continued its recovery, pulling within 1% of its pre-Lehman close of 1251.70. Considering the nation was already in recession for 9 months when Lehman failed over two years ago, this provides some perspective on how long this recovery has been ongoing. The most stunning recovery of all is the Nasdaq 100, which is now within 1.1% of its November 2007 peak. Once that is exceeded, the bubble and implosion levels of 2000-2001 become the new yardstick for measuring. The NDX recovery has been widely fueled by Apple, which accounts for over 20% of the index due to its poor construction methodology. A fairer measure of Nasdaq performance would be the Nasdaq Composite, which is well above its pre-Lehman levels and is within 8.5% of October 2007 peak.
We often discuss levels of exposure and positioning. Approaching yearend makes it a good time to discuss such topics. Several times recently, we have mentioned that only low, single digit earnings growth will likely be necessary in 2011 for the S&P 500 to post a record earnings year, surpassing the $87.72 earned in 2006. As the market and earnings approach important milestone levels, the specter of second-guess risk increases for managers. For example, should the market come through with record earnings and an impressive performance in 2011, it will be expected of managers to be there participating.
Late last week, the quarterly Flow of Funds (FOF) as of September quarter end published by the Federal Reserve offered some interesting insight. There are some notable highlights in the data for the vanilla investment community. The Private Pension category of the FOF also includes 401Ks and IRAs, in addition to Pension Funds. For the majority of the past 3 decades, Pensions had 42% of assets in Equities (Chart 1). At the end of Q2, it was 31%. Remarkably, at the end of Q3, it was only 32%, which is not much of an uptick considering the S&P 500 rallied 11% in that quarter.
The next major asset class is Mutual Funds, which comprises 34% of assets (Chart 2). Throughout the Great Moderation, Mutual Funds as an asset class were in a major growth phase. The growth has continued through the Great Recession, but as most market watchers are aware, the overwhelming majority of Mutual Fund Flows over the past several years have gone to Bond funds. The final major asset class is Credit Instruments, which are now 20% of Assets (Chart 3). Interestingly, Treasuries, the sub category within Credit Instruments experienced a large overall rise from 2% to 8% of total assets (Chart 4). The last time they were that high, the 10 Year Treasury yield was 8%, not the 3.3% it is today.
The views expressed are O'Rourke's, not FNArena's (see our disclaimer).
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