Millions of individual investors opened their February statements, saw that their stocks were down 19% on the year and sold out, driving the S&P 500 on March 9th to the lowest level since September 1996. As hedge funds already sold stocks last fall, and institutions sold stocks over the winter, individual sales marked the final exhaustion of the selling which began with the September 15th bankruptcy of Lehman Brothers. Financial stocks, which include banks such as JP Morgan and Goldman Sachs, insurance companies and REITS, fell as much as 52% between the end of last year and March 9th, but gained back half that loss by month end - the best performing sector in the S&P 500 for the month of March. Overall US stocks delivered the best return since October 2002, which coincidently marked the end of the last bear market. So far, the rally is continuing into April.
Why the sudden change of sentiment? With US stocks down 57% from the October 2007 peak, valuations were at the lowest levels since 1982. Many top down analysts feel that the S&P 500 is still overvalued at these levels, because losses in the financial sector crushed earnings estimates for the S&P 500. Outside of financials, however, the earnings picture is by no means as bleak. Technology companies, for example, are doing fine simply on replacement spending by companies and individuals - that sector is UP nearly 10% on the year. Worldwide demand for commodities has bottomed (oil for example is 30% higher than the low of $39.72/barrel touched mid-February.) Energy stocks are still down 7%/YTD but the Materials sector is up 3%. Also reflecting an uptick in demand for commodities and basic manufacturing, the Bombay (India) stock market is up 4%, Brazil is up 16%, and China is up 45% on the year. In the US, the NASDAQ is up 2.4% on the year, while the NASDAQ 100 (the largest cap technology and medical stocks) is up 7.4%. The S&P 500 is still negative on the year, but the loss is trimmed from down 25% to down 6.6%.
So bottom line, plenty of investors see opportunities even though the world's financial system is still mired in problems. Is it too late to get invested? At current levels, the S&P 500 is back to the level of January 31st of this year and has to rise another 7.5% just to get to breakeven on the year. Stocks must gain 48.9% to eclipse the level of September 12th, 2008, right before the financial melt-down, and rise 86.2% to break the October 2007 record. At the post 1945- average return of 10.4%, US stocks wouldn't make a new high for 6-7 years.