Stock Market lessons from the Financial Crisis

TradingPub Admin | December 26, 2012

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Let's take a look at what American investors have potentially lost out on by shunning stocks for different assets since the financial crisis.

Stocks Surge 
Stocks have skyrocketed since the most recent bull market started in March 2009, with data provided by Morningstar Inc. and Bloomberg indicating that the S&P 500, a benchmark index of blue-chip equities, surged 94 percent since the Financial Crisis in 2008.

In addition, the assets contained in exchange-traded, mutual and closed-end funds that focus on equities have spiked 85 percent to reach a value of $5.6 trillion, according to the news source.

Investor Wariness
Even though stock markets have displayed sharp appreciation in the last four years, it has not prevented investors from its wariness of this asset class, the media outlet reports. These individuals have been burned by a dire bull market in 2008 that lopped 40 percent off the S&P 500, and eliminated $11 trillion in equity values from U.S. stocks.

In addition, many asset markets have been experiencing significant volatility, as market participants push stocks up and down in value. This perception that equities fluctuate significantly may be overstated, according to data compiled by Bloomberg indicating that the S&P 500's average daily swing has fallen from 1.74 percent in 2008 to 0.59 percent thus far in 2012.

"We've had all of this crazy risk-on/risk-off day-to-day fluctuation based on headline stories," John Carey, who contributes to the management of around $200 billion at Boston-based Pioneer Investments, told the news source during a phone interview. "There's been attractive income for stocks but certainly at the price of some volatility."

"Our biggest liability in the stock market has been the total destruction to confidence," James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which has around $325 billion under management, told the news source in a telephone interview. "There's just so much evidence of this recovery broadening."

Many market participants are taking their money out of equity-based investments amid the current environment of economic uncertainty.

Record Corporate Profits 
This may not be a bad time to put money into equities, as the media outlet reports that the U.S. economy economic recovery has been speeding up lately and that companies whose profitability is most directly affected by this accelerating growth benefit the most from this upturn, according to the media outlet.

A perfect example of this strong growth is the appreciation in the S&P 500, where 481 of the companies contained in the group of stocks have risen in value since March 2009 or when they entered the index.

Even though companies currently boast a record $1.03 trillion in their collective cash hoard, this selling point is failing to entice investors and stocks are selling below their usual valuations, the news source reports.

The S&P 500 has been trading at a price-to-earnings ratio below its average value since 1954 for the longest time since Richard Nixon was president of the United States, and currently trades at 14.5 times reported earnings. This figure is reasonably low, considering that it represents a 12 percent discount below the six-decade average.

While the demand for equities may have suffered in the last several years, investor desire for bonds has surged. These market participants have frequently been abandoning equities for debt-based instruments, which are generally less risky. Consequently, yields on bonds have declined in many cases and become negative in certain circumstances.

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