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The S&P 500's surge past the 2,000 level this week for the first time ever is just the latest milestone for the great rally that stocks have enjoyed over the past 5½ years. But Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, doesn't think the latest splashy market headlines will do anything to bring in the many retail investors who have long been staying on the sidelines.
Individual investors are "still nervous, they're concerned," Silverblatt said on CNBC's "Futures Now" on Tuesday. "Even though we're into this rally over five years now, and they're getting very little if they're sitting in a bank or some alternatives, they are not moving back into the market." And he said the S&P's crossing of 2,000 won't lure retail investors.
After all, many small investors will not soon forget the market collapses of 2000/2001 and 2008/2009, which robbed them of their confidence in stocks. And in fact, the S&P has taken more than 16 years to get from 1,000 to 2,000—yielding a mere 6.2 percent annualized compound return, including dividends, from then to now.
Forget the daily battle between bulls and bears. The most important disagreement in finance revolves around a deeper and more contentious division. It's a civil war that divides Wall Street firms, Nobel Prize winners and even Supreme Court justices—and it leaves ordinary investors wondering what to do with their money.
That would be the fundamental question of whether markets are "efficient." In other words, whether stocks and indexes respond immediately and appropriately to all available information. If they do, trying to beat the market is a fool's game almost certain to result in wasted money and effort, not to mention inferior investment decisions. If they don't, the smartest minds on Wall Street have a serious edge.
This week, the most famous critic of the theory, Robert Shiller, made the case that since stocks have gotten expensive, investors would be wise to rethink their allocation decisions.
"The lesson now is not to go overboard in the stock market, and also to have enough savings for your retirement, because the market is not likely, overall, to do as well as it has in the past," Shiller said on CNBC's "Futures Now" on Thursday.
And while Shiller says that data now show the market as a whole to be in overvalued, and even "bubbly," territory, he says some stocks still offer relative bargains—and encouraged investors to buy those value names.
"There's a time-honored principle called 'value investing,'" he said. " It goes way back to Graham and Dodd in 1934 [when their landmark book, 'Security Analysis,' was first published]. And it still works, I believe. And that is to look among these major asset classes, look for lower-priced components."
As prudent as that sounds, encouraging people to step back from stocks when they look expensive, and favoring stocks that look valuable, have become two increasingly controversial cases to make.
None other than the godfather of value investing, Warren Buffett, used a letter to shareholders earlier this year to encourage investors to put nearly all their money into stock index products, rather than trying to pick specific stocks or try to time the market.
"The goal of the nonprofessional should not be to pick winners—neither he nor his 'helpers' can do that—but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal," Buffett wrote.
He added that to avoid "mistiming" the market, investors should "accumulate shares over a long period" and "never sell when the news is bad."
The individual investors Buffett was targeting—who were perhaps already getting sick of the daily flood of stock-picking articles headlined "Invest Like Warren Buffett"—certainly seem to have heeded his advice.
In his shareholder letter, Buffett more specifically advised investors to "put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund (I suggest Vanguard's)." And as a result, investors added $5.5 billion to the Vanguard fund in the next five months, three times more than the same period in the year prior, according to The Wall Street Journal.
If everything's expensive, then what do you buy?
That's the riddle facing Yale economist Robert Shiller, who makes the case that both stocks and bonds look expensive now, and "bubbly thinking" abounds.
Shiller's advice is actually three-fold. First, find a proper asset balance for your portfolio. Second, use the strategies of "value investing" to pick the best stocks out there. Third, temper your expectations.
Equity valuations aren't justified, "but I would say that they're not outrageous yet. And given the alternatives, I think people still should have money in the market," Shiller said Thursday on CNBC's "Futures Now." "The lesson now is not to go overboard in the stock market, and also to have enough savings for your retirement, because the market overall is not likely overall to do as well as it has in the past."
When asked what sort of allocation percentages people might want to target, Shiller demurred.
"That's a difficult question! My first advice to most people would be, get a financial advisor. Because the answer to that question depends on your circumstances, your fears, your desire for a bequest to your children, whatever. And so there's no simple answer," Shiller said.
But for this Nobel laureate, the basic idea of asset diversification holds.
"I think that the general rule is, you do want to diversify across all the asset classes. Bonds and stocks look pricey, real estate is starting to get pricey. So, you know, you've got to put your money somewhere," he said.
David Rosenberg, chief economist and market strategist at Gluskin Sheff, famously (and for some, infamously) turned from a long-term bear to bull in 2012. He's still optimistic about the U.S. economy and American equities. But now, Rosenberg admits to becoming somewhat discouraged by data he's seen—and perhaps a bit more skeptical about the future.
"I have to say that for a former bear-turned-bull who tried for the past two years to see the world from a cup-half-full lens, the last few weeks have been more than just a bit frustrating," Rosenberg wrote in a Monday note. While he's not changing his views just yet, Rosenberg said he has "no intention of sitting on a stale view," and compared his reassessment to a ratings agency putting "a doubtful debtor on 'credit watch.'"
On Tuesday's "Futures Now," he made it clear that he was none too enthusiastic about the pace of economic growth.
"I'm reconsidering in the sense that I don't think we're going to see a significant rebound—call it something better than 3 percent for the second half of the year," Rosenbeg said. "There was a point at which I thought that was achievable, especially because of the job gains we've seen. ... But what's happening is that the savings rate in the household sector is going up. ... The spending numbers are lagging well behind whatever we're seeing in unemployment and income, and that's caused me to shave back what I think was an above-consensus view for the second half of the year," he said.
A glance at a chart seems to indicate that stocks are expensive. After dropping 4.3 percent from high to low, the S&P 500 is nearly back to record levels. And as bears delight in pointing out, the market has not suffered a 10 percent correction in more than two years. But according to one simple measure of market valuations, investors who buy stocks now are getting a much better bargain that those who bought earlier.
In 2014, "different than 2013, the move higher is driven primarily by an improving corporate outlook than a re-rating of market multiples," writes RBC chief U.S. market strategist Jonathan Golub in a Monday note. "In fact, forward P/Es [or price-to-earnings ratios] have actually contracted modestly, making stocks a more attractive purchase."
Translation? Investors are paying less for every dollar of expected earnings.
As for reported earnings, they have come in above expectations. According to FactSet, of the S&P 500 companies that have reported their second-quarter results, 73 percent have beaten analyst earnings estimates and 64 percent have beaten revenue estimates. That means that while analysts on the whole were looking for earnings to grow 4.8 percent in the second quarter, so far we've seen a blended growth rate of 7.6 percent.
And with companies beating expectations, analysts have responded by raising their estimates of the earnings that companies will report in the future.
"Over the past four months, estimates have begun to rise for 2014. Higher estimates are likely the result of stronger management guidance and greater analyst confidence. We believe this is a bullish sign for equities," Golub writes.
As a spate of housing data are released in the coming week, Wall Street will attempt to answer a burning question: Is the housing market becoming a big drag on economic growth?
"We are laser-focused on this housing data coming out, because we have seen that the backbone of the recovery was housing. Now it's faltering slightly. So if we see another mishap here, maybe that adds to the slowing global growth—especially domestically," said Jeff Kilburg, chief executive of KKM Financial.
The data start to emerge on Monday morning, when the National Association of Home Builders releases the latest reading on its housing market sentiment index. That widely watched gauge of the housing market rose to a six-month high in July, but is still down on the year.
On Tuesday, the all-important housing starts number will reveal how many residential buildings began construction in July. The July number will follow a big disappointment from June, when 893,000 homes were started on a seasonally adjusted annualized basis—a nine-month low.
Thursday's existing home sales data will round out the week.
Recent indicators have not squelched concerns about housing. On Wednesday, the Mortgage Bankers Association reported applications to buy a house fell to a six-month low in the week prior.
Still, there are some reasons for optimism. According to Freddie Mac, 30-year mortgage rates have fallen to just 4.12 percent, which brings it back to its lowest levels on the year.
Given the decline in interest rates, as well as this year's impressive employment growth, "I would have expected more out of housing," said Stuart Hoffman, chief economist at PNC Financial Services. The weak housing market "is a disappointment, and somewhat of a downside risk to the economy. But with mortgage rates coming down and credit standards loosening, I would expect housing to have a better second half of the year."
After falling more than 4 percent from recent highs, the S&P 500 has gained back about half of what it lost. But MacNeil Curry, head of global technical strategy at Bank of America Merrill Lynch, says the correction isn't over yet—and he says it won't take a spate of bad news to push stocks lower.
Actually, on Thursday's "Futures Now," he took issue with the whole idea that markets make big moves in response specific datapoints or events.
"I'm not a big believer in catalysts. I think if you go back, if you look historically, most market moves don't transpire off of catalysts," Curry said. "The information as to why a market is trending in the direction it is, is usually not known at the time the trend is beginning. So I don't think we necessarily need a catalyst. I mean, there could be a thousand reasons why an investors says, 'You know what? I want to turn more bearish here.' [And] what drives a market is sentiment."
The crude oil market has seen dramatic spikes starting with the Arab Spring in 2010 and continuing into this past June, but some investors are betting that the bull market for oil is over.
Copper futures slid more than 1 percent Wednesday, falling to the lowest level since late June as investors looked at an increasingly dour picture for global growth.
According to data released Wednesday, China's industrial production rose 9 percent in July, and its retail sales rose 12.2 percent. Both numbers missed expectations. And in more bad Chinese news, new loans for July fell nearly 70 percent from June.
In reaction to the disappointments, the industrial metal copper—which is used in everything from factory equipment to new buildings–dropped sharply overnight, hitting the lowest level since June 20.
"It's pretty much the Chinese data that really sank the copper market, and the business with new loans," said Edward Meir, a metals analyst with INTL FCStone. "All these Chinese stimulus measures really fell short when it came to changing the psychology."
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