|source: FactSet; JP Morgan|
I posted a note last Friday about the widespread pessimism among individual investors.
Most, it seems, either think that the market is due for a "correction" or something worse in the near future. From a contrarian standpoint this is good news, since bear markets rarely begin when investor sentiment is so negative.
There are additional reasons, however, to remain optimistic about stocks, and fight the urge to sell and head for the sidelines.
If you look at the chart above, for example, you can see the valuation of the market is significantly better than the prior two times the S&P traded at today's levels.
In particular, bond yields relative to price/earnings multiples are significantly lower. There is doubtlessly a large group of investors that are heading for stocks not necessarily because they are wildly bullish about business prospects, but rather they need income.
This is confirmed by the relative performance of the sectors in the S&P.
Merrill Lynch pointed out in a note published this morning that the market has been lead by health care and consumer stocks, which are traditionally favored by conservative investors. Merrill indicated that both sectors have recently hit all-time highs. Telecom and utility stocks have also reached levels not seen since 2007.
Finally, the fact that so many investors continue to pile into bonds despite historically low yields would seem to confirm that the "animal spirits" of the investment community has been largely absent from the gains over the past few months.