The S&P 500 appears set to end 2010 near its high for the year, but - according to a new outlook Friday from Royal Bank of Canada - that doesn't mean it's time to take profits or become fearful that you've missed the opportunity to dive into the U.S. equity market.
Myles Zyblock, RBC's chief institutional strategiest, believes investors should maintain above-benchmark weightings in equities heading into 2011 while raising exposure to cyclical sectors and groups.
It's particularly timely advice, given our loonie is still near parity and providing a lot more purchasing power when it comes to venturing down south.
He argues that the improvement seen in U.S. and global macroeconomic data since the summer suggests the economy and earnings will continue to recover, and sees S&P 500 earnings per share finishing the year near $81 (U.S.) and rising to $88 next year.
"We recommend that investors maintain a positive strategic bias towards the equity market and tactically add exposure on price pullbacks," he said in a research report.
Mr. Zyblock, currently overweight energy and technology, believes this is an opportune time to bulk up on Industrial names. Corporate spending on machinery and equipment is likely to remain strong, given low capital costs and solid cash flow growth. He also finds it noteworthy that Chinese Industrials have seen an uptick, as this typically offers a four-month leading window into the performance of the S&P Industrials.
Just resist the temptation to load up broadly on U.S. stocks, he said. He believes the benefits of individual stock picking will make a comeback in the year ahead.
"In our opinion, the shelf life on performance homogeneity is limited by the fact that, beyond a certain minimum timeframe after a major market or economic low, company-specific fundamental divergences become more apparent," he said.
The correlection between broad asset classes has already loosened a bit, "providing an early clue that investors have shifted away from their near-universal macro focus," he says. For instance, the positive correlation between bond yields and stock prices has declined from 0.83 to 0.08 over the past six months.