Shock to Investor Confidence, But Opportunities Persist
By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.
Unfortunately, our contention that Standard & Poor's downgrade of U.S. debt "may present an additional shock to investor confidence and cause equity markets to sell off" came true with the Russell 1000 U.S. Large Cap Stock Index plunging 6.87% and the Russell 2000 Small Cap Index losing 8.9% yesterday, sending Equity indices into negative territory for the year.
While it is clear that markets are frustrated with policymakers around the globe and their inability to enact useful and timely measures to address sovereign debt issues, among others, it seems that today's market action is a reflection of just that—emotion—and not necessarily the fundamental indicators of the U.S. economy. These indicators are still suggesting a higher probability of a slow recovery than a double-dip recession. Yesterday's equity market sell-off, if it continues, could certainly further dampen investor, business and consumer confidence and make a double-dip recession a self-fulfilling prophecy. It seems, however, that the overall fundamental economic data in the U.S. coupled with extremely attractive equity valuations at these levels should provide some support for the markets going forward and may offer a very attractive buying opportunity for long-term investors.
We reinvested cash into equities in our balanced and asset allocation funds yesterday (following a 14% sell off in Equities and after we de-risked the portfolios in the second half of July) based on this logic. Included below is a Bloomberg valuation chart (see forward 12-months PE (Price-to-Earnings ratio) for S&P 500 in yellow) which indicates that equity valuations are now at the same levels as they were at the depth of the financial crisis in 2008. At the same time, the U.S. economy is on a positive (albeit painfully slow) economic trajectory and U.S. companies' balance sheet health, cash positions and profitability measures are at historic highs.
While we may see further volatility in the equity markets, this may be the time when buying the dips could produce the potential for greater returns for those who dare to step in during the time of uncertainty.
Bloomberg consensus 12-months forward PE for the S&P 500 is 10.13.
Valuation of S&P 500 at Daily Market Closing (Actual and Estimated) as of 8/8/2011
This commentary represents the opinions of its author as of 8/8/11 and may change based on market and other conditions. The author’s opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
Accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.
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