Manufacturing Rebound, Earnings Boom Revive Investors' Hunger for Stocks It's easy for investors to become short-sighted in an era of frenetic markets and hyper-accelerated news cycles. At this moment, the consequences of big Republican victories in the midterm elections and the size of soon-to-be-revealed quantitative easing measures by the Federal Reserve seem to be holding center stage in the nation's financial theater.

But investors should look past Wall Street's latest headlines and distractions, and focus on the broader economic picture being painted by recent data: A robust manufacturing rebound seems to be taking shape across the world, and third-quarter earnings have been highly impressive.

These strong fundamentals are finally starting to get investor attention and could set the stage for a stock market rally that will last well beyond the immediate aftermaths of the elections and Fed moves.

Europe became the latest region to report a manufacturing renaissance. While manufacturing was already expanding in September, a key index showed an acceleration in October that was even faster than initial estimates.

The bullish European data comes in the wake of strong manufacturing expansions in the U.S., U.K., China and India. Moreover, the export sectors in key large economies continue to strengthen, thanks to demand driven by rapidly expanding emerging markets. This robust demand is being reflected on corporate balance sheets as well. As third-quarter earnings season winds down, the results have been very encouraging as companies breezed by strong expectations.

Ready to Bet on the Equity Risk Premium


Those fundamentals finally seem to be persuading individual investors who were battered by the financial crisis and have been understandably skittish about risky assets like stocks. Despite their meager yields, investors have piled into less-profitable assets like bonds that are seen as safe.

But with bond yields at a trickle even as corporate earnings boom, individual investors are becoming increasingly aware of the gap. The equity risk premium -- the amount of extra yield investors demand from riskier assets like stocks -- has now shot to a five-decade high, according to analysts at institutions such as JPMorgan Chase (JPM).

Big companies have been quick to take advantage of the situation. They have been selling the parts of their capital structure that are overvalued and buying back the parts that are undervalued. Bond issuance and stock buybacks have been on the rise.

That risk premium, though, is finally generating a revival in interest among retail investors. Asset allocation to stocks in portfolios is again starting to reach levels on par with historical norms, according to the American Association of Individual Investors. And U.S. mutual fund inflows have climbed to highs last seen in April, according to Investment Company Institute.

Hedge Funds and Individuals Return


"The evidence shows that global retail investors are finally warming up to stocks, having bought more over the past month than they bought year-to-date up to September," analysts at JPMorgan wrote in a note to clients this week. "Asset allocators have added and are on net overweight, but are well off the positions they hold during sustained bull markets."

Hedge funds have also been buying aggressively over the last two months to bring their stock positions to near April highs but are well below the levels they held before the financial crisis, JPMorgan analysts note. "Adding up all investors in the world, we find that their equity holdings are just below their 20-year means versus bonds and cash," analysts wrote.

In other words, while the yields on stocks outshine those offered by bonds by the highest ratio in five decades, investor holdings are still only coming back to the levels where they've been during the past two. Meanwhile, based on 2011 forecasts, earnings for the S&P 500 companies are on pace to hit record highs next year.

So, as individual investors finally start to feel comfortable again with stocks, expect the market to pick up steam.


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mileybug

What's driving the market? The richest lovers of Wall Street arek taking advantage of great buys because THEY can afford it. Most of us can't, like 98%. If you don't have a job, or have alow paying job or a part-time job, you are not the ones driving the ever lovin' Wall Street. Has NOTHING to do with politics...has EVERYTHING to do with who is rich, richer and richest.

November 04 2010 at 12:44 PM Report abuse rate up rate down Reply
1 reply to mileybug's comment
wfreeberg

It's not just the rich, they actually play a minor role in the stock market. It's the institutional buyers; those that manage your 401k, retirment, mutual funds, etc.

November 04 2010 at 1:09 PM Report abuse rate up rate down Reply
ingfp

The party of oppression and a Marxist leader lost last night ...stupid.

November 04 2010 at 8:15 AM Report abuse -1 rate up rate down Reply
MSmailbox

Does anyone know where I can buy the new UAW-bonds?

November 04 2010 at 7:11 AM Report abuse rate up rate down Reply
MSmailbox

The fast keep getting faster and the small keep getting smaller... No more hints!

November 03 2010 at 4:44 PM Report abuse -1 rate up rate down Reply
MSmailbox

The answer is simple... Americans lust after equity. No other nation in the world, has a more courageous outlook. We are bold, we are beautiful... "We are the Champions, of the World!"

November 03 2010 at 4:43 PM Report abuse rate up rate down Reply
tmoschetti

This is all a lie. The Fed is going to print $600 billion which will end up in the stock market in a cynical attempt by the administration to make things APPEAR better than they really are. The Fed is monetrizing the debt something Bernanke said he would NOT do. This will eventually lead to huge inflation, which is already showing up at the wholesale level. Just wait until you see food prices next year. They will be rising rapidly, while, because of the Fed's action, the value of you rmoney will be much less! This is our corrupt government in action saying, how can we fool em today!

November 03 2010 at 3:10 PM Report abuse rate up rate down Reply
scrappydobdo

Manufacturing and Earnings Are Reviving Where in China or some other country not here in the USA. What manufacturing job?

November 03 2010 at 3:00 PM Report abuse rate up rate down Reply
ajgorm

The price of government keeps going up. Paying for it is the problem.

November 03 2010 at 2:57 PM Report abuse -1 rate up rate down Reply
prognesub

Without the Fed the economy is dead. The sooner the Tea Bag/Republican oafs leaen this, the better chance they stand for survival.

November 03 2010 at 2:28 PM Report abuse rate up rate down Reply
1 reply to prognesub's comment
tmoschetti

THe fed, was a big part of the reason for the sub prime crisis, by ARTIFICALLY keeping interest rates too low, thereby encouraging people to pruchase homes they couldn't afford.

November 03 2010 at 3:14 PM Report abuse rate up rate down Reply
simpsongrsm

Obama is concluding his press conference! HE JUST DOESN'T GET IT! More of the same old bull**** and refusal to accept responsibility. He is going to fight to the bitter end any attempt to repeal Obamacare - which if not repealed will bankrupt the country! OBAMACARE MUST BE REPEALED IF THE REPUBLIC IS TO SURVIVE! Obama will continue to be a "Nightmare President" - the next two years will continue to be a "Living Hell" for America!

November 03 2010 at 2:00 PM Report abuse rate up rate down Reply
2 replies to simpsongrsm's comment
Susie

Bankrupt the country? Actually it reduces the deficit which Medicare costs are driving up.

November 03 2010 at 2:11 PM Report abuse rate up rate down Reply
prognesub

Hmmm. Wonder how many senior Republicans are going to like having their party pull the Medicare rug out from under them ?

November 03 2010 at 2:32 PM Report abuse rate up rate down Reply