SPDR S&P 500 ETF (NYSEArca: SPY) posted its largest rally in two months Monday on hopes Washington will reach a deal to avoid going over the fiscal cliff. Some investors were also buying stocks on cheaper valuations following the post-election sell-off.
Recent equity weakness and rising company profits means valuations are beginning to look attractive from a price-to-earnings perspective, according to a report Monday.
Given the 4.8% drop in the S&P 500 and an increase in company earnings, the S&P 500’s price-earnings ratio is below the ending level of eight of the nine bull markets since 1962, which makes it the cheapest bull market since Reagan was in office, Bloomberg reports. [Broad Stock ETFs Fall Below Long-Term Trendlines]
“The stock market looks cheap because people are way too pessimistic about what growth looks like for the next 10 years,” Brian Jacobsen, chief strategist at Wells Fargo Advantage Funds, said in the article. “You can get big and rapid moves in the market when expectations are so low.”
Jacobsen projects the S&P 500 will hit 2,000 in 2014, or gain 47%. [A Closer Look at Three S&P 500 ETFs]
Vanguard chief investment officer and indexing guru Gus Sauter recently told CNBC that valuations are the best predictor of future returns in stocks, which are “reasonably” priced with a price-to-earnings ratio of about 13 based on forward earnings. [Vanguard CIO Sauter: We’re in Long-Term Bull Market]
Bargain hunters have taken notice and are fueling the big rally Monday, with the S&P 500 up 1.5%. Some saw the recent sell-off as over done and are now jumping at the chance to buy stocks at the cheap at the start of the holiday-shortened week. Seasonal factors can lift the market at the end of the year, although investors remained worried dividend taxes could rise in 2013.
Meanwhile, investors are also optimistic Monday after leading Republican and Democrat lawmakers remained confident Sunday in reaching a deal, reports Karen Brettell for Reuters.
“There have been signs of life,” Jim Vogel, an interest rate strategist at FTN Financial, said in the Reuters article. “I think the big possibility to watch for is how much of a recovery we can create in equities, and then how long that holds.”
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Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.