Stock exchange traded funds were posting their second straight day of big gains Monday as bargain-hunters stepped in following the recent sell-off that some analysts say has created enticing valuations.
Anxious investors have dumped equities on growing uncertainty over the global economic recovery and the Eurozone debt crisis. However, ETF manager BlackRock (NYSE: BLK) believes that a large proportion of the market may be oversold.
“In many cases the decline in share prices has been far beyond what fundamentals would justify,” according to a recent note from BlackRock, which oversees the iShares ETFs. “As such, we believe stocks as a whole are very attractively valued.”
Stock and oil ETFs rallied Monday as a bank merger in Greece and lingering expectations the Federal Reserve will announce additional stimulus at its meeting next month helped lift markets. The iShares S&P 500 (NYSEArca: IVV) climbed nearly 2%. [Stock, Commodity ETFs Rise]
BlackRock, though, cautions that there are still risks associated with equities, especially if the economy slides into a recession in which case “stocks would obviously weaken,” but the investment manager does not believe a U.S. recession will occur.
The analysts estimate that the upside outweighs the downside risks over the long-term but expects stock ETFs to remain volatile and range-bound over the near-term, with the S&P 500 to remain bound between 1,250 and the 1,100 low. [Stock ETFs Waver]
Investors are paying less for stocks than they have during every recession since Ronald Reagan was president, Bloomberg reported Monday. “There are truly some terrific values out there in companies, but it’s a question of timing,” said John Massey at SunAmerica Asset Management, in the report.
However, some market watchers point out that analysts’ profit forecasts may be too high. “Also unsaid was the impact of recession on earnings,” Barry Ritholtz, chief executive at quantitative research firm Fusion IQ, commented on the Bloomberg report.
“The Reagan Recession came at the end of a 16-year bear market, plus benefited from [Federal Reserve Chairman Paul Volcker] breaking the back of inflation. The threat today is a Japan-like deflationary spiral, including falling asset prices and an unwillingness for investors to buy up for a dollar of earnings,” Ritholtz wrote. “In other words, a falling [price-to-earnings ratio] could be evidence of an ongoing deflationary phase, and not proof that markets are cheap.”
iShares S&P 500
Max Chen contributed to this article.