Investors STILL Fearful Despite Best Stock Rally in 25 Years

America’s confidence in the stock market continues to teeter, but yet one of our main gauges of the market is soaring to new heights.

The Standard & Poor’s 500 Index is having its best start of a year in 25 years. But yet many American’s aren’t noticing it...

According to Bloomberg data, the benchmark gauge for U.S. shares jumped 6.9% in 2012, making it the most since it rose 14% to begin 1987.

The Index traded at an average of 14.1 times earnings since the beginning of 2011, the lowest annual valuation since 1989.

U.S. equity mutual funds have been slammed over the past five years with more than $469 billion being pulled from them while the New York Stock Exchange volume slipped to its lowest since 1999.

From Bloomberg,

Pessimism is taking a toll on the securities industry, where more than 200,000 jobs were lost last year, even as U.S. unemployment declines as the economy accelerates. Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.

But right now, there is fear in the eyes of the investor. Philip Orlando, chief equity strategist at Federated Investors Inc. says “investors are scared to death. The fears are justified, but from a valuation standpoint the market has overshot, as it typically does. We’ve been pounding the table to put money into equities.” 

Last week the S&P 500 Index rose 2.2% to 1,344.90 after the U.S. unemployment fell to the lowest level since February 2009. Also playing a rose in the S&P was the manufacturing growth of its fastest rate in seven months.

S&P March futures retracted down just 0.4% at 7:05 a.m. in New York today.

The gain was spearheaded by companies who actually dropped at least 20% last year such as Whirlpool Corp. (WHR) soaring 26%, Genworth Financial Inc. (GNW) jumping 17% and Cummins Inc. climbing 13%.

Analysts continue to wonder when Americans’ confidence will rebound as the economy is showing strong signs that it will. Sentiment has declined even as the S&P 500 rose nearly 100% since March 9, 2009. Investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, which is the longest streak in data since 1984. Withdrawals were $135 billion last year, the second-highest total after 2008, according to the Investment Company Institute in Washington.

The 106% expansion in U.S. earnings during the past nine quarters is the most since 1987 and was what fueled the strong $&P 500 rally.

“The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds,” says chief investment strategist at Charles Schwab Corp., Liz Ann Sonders. “That’s never happened.”

The trends that are being show are complex, as the S&P 500 has rallied on many levels, yet America is not budging. Valuations have fallen even as the S&P rallied 21% since the end of 2009 because profits increased five times as fast.

The price-earnings ratio for the benchmark gauge of American equities has fallen to 14 times reported income, down from 24 at the end of 2009. The ratio slipped as low as 10.2 at the end of the 17-month bear market in 2009, when the S&P 500 declined 57 percent. 

Trading at the NYSE declined last month to its lowest since 1999, with the average volume over the 50 days ending January 25 dragging to 838.4 million shares. Also, the value of stock changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.

“It was the severity and the quickness of the fall and how long it’s taking to come out of the trough (sic) that’s been adding fear and anxiety,” says Warren Koontz, head of U.S. large-cap value stocks at Loomis Sayles & Co. “Over time, if things continue to progress on a step-by-step basis, people will come back to stocks.”

But optimism is still present and many analysts think it will reach the masses soon. The retreat leaves stocks in position to rally because so many bearish investors can be pulled back to equities and the market is cheap.

The chief investment officer of Guggenheim Partners LLC of California, Scott Minerd speaks of hope in the market, it just depends on how quickly you’d like to see that hope profit returns…

“Stocks are poised for a generational bull market, whether it starts this year, or next year, or in five years, is anybody’s call. Even if we had a 50% increase in multiples, stocks would still be cheap.” 

*Quotes and indented excerpts from Bloomberg

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