For the first time in nearly two years, Doug Cliggott, J.P. Morgan's equity strategist, is saying that the stock market is fairly valued.
Cliggott today raised his recommended allocation of stocks to 60% from 50%. He cut his recommended allocations in both bonds and cash to 20% from 25%. Cliggott last changed his allocation in February of 1999, when his recommended stock allocation because
the valuation model he uses showed the
S&P 500 as overvalued.
Taking the long view, that doesn't seem like it was such a bad move -- the S&P only gained about 3.4% between the day he made the change and yesterday's close. But Cliggott obviously did miss the big move the S&P had through last winter. His valuation model, which compares Treasury yields to the earnings yield of the S&P (earnings divided by the index's price), appeared to be broken.
Having seen stocks fall so hard since the spring, however, makes the model seem at least a bit more valid. And it should be noted that the last time that the model shifted from showing the S&P as overvalued to fairly valued was Sept. 4 1998, which turned out to be a honey of a time to buy.
Cliggott isn't expecting that to happen this time around -- the model's about showing what kind of risks are in stocks, rather than precisely market-timing them. And a move to neutral isn't exactly a call to load up the truck.
"The reason we stopped at 60% is we think the first six months of next year could be rough," says Cliggott. He reckons that investors will have to get comfortable with S&P earnings growth of only 6% compared to current expectations of 9% or 10%, and that could be troubling for the market. And he worries that the economy could slow to such an extent that earnings could actually end up flat on the year.
In the long run, flat earnings shouldn't matter, because lower earnings mean lower bond yields and lower bond yields make the relative return of stocks more attractive. But it could be bumpy along the way.
Moreover, Cliggott continues to favor stocks of companies that can deliver in earnings growth in a slowing economy -- pharmaceuticals, beverages and foods -- while underweighting things like the retailers, automakers and the techs, which tend to see earnings growth shift up and down with economic growth.