Analysis: S&P closes in on record, but stocks may still be cheap

Tue Feb 12, 2013 7:09pm EST
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By Rodrigo Campos

NEW YORK (Reuters) - In March 2009, it was easy to say stocks were cheap - the S&P 500, after all, had lost half its value. Fast-forward almost four years, and U.S. stocks have recovered almost all of those losses, and now sit just a stone's throw from a new record.

It might be tempting to suggest it is time for a pullback. Yet, for many investment strategists, the combination of a gradually improved economy, Federal Reserve stimulus, and relatively inexpensive valuations has them predicting further gains - and even talking about the chances of a new bull market.

"The national conversation for four years has been, 'Are you being conservative enough in this high risk world?'" said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

"I think as we go to new highs that is going to change to 'Are you being too conservative in what may be a new bull market?'"

It's likely that before long the S&P 500 .SPX .INX will surpass its 1,576.09 record, reached October 11, 2007. On Tuesday, it closed at 1,519.43. The Dow is even closer, only about 1 percent away from its all-time record of 14,164.53.

Still, the value of stocks against earnings expectations shows the market is cheaper than in 2007. In addition, the economy appears to be improving rather than peaking, and earnings are much less reliant on what was then a heavily leveraged financial sector.

In addition, the Federal Reserve's massive bond-buying programs, designed to keep interest rates low, has boosted the market's value. That raises concerns about what will happen when the Fed says it is ready to begin tightening policy - but that could be some time away as the central bank is targeting a jobless rate of 6.5 percent against 7.9 percent in January.

And, in any case, if the Fed did stop its easy money policies it would be a sign that economic growth was climbing.   Continued...

Traders work on the floor of the New York Stock Exchange in New York, December 21, 2012. REUTERS/Andrew Burton