Concern is also increasing that the Fed’s policy of asset purchases and near-zero percent interest rates that has underpinned the rally since 2009 is closer to completion than the central bank previously acknowledged. Policy makers, expressing concern over an expanding balance sheet, debated ending their bond-buying as early as this year, minutes of their Dec. 11-12 meeting released last week showed.
Bulls point to U.S. building applications and hiring that have climbed to four-year highs as reasons companies whose earnings are most sensitive to economic growth are doing the best in equity markets. Morgan Stanley’s Cyclical Index jumped 3.9 percent in December, its fifth straight monthly advance. Caterpillar Inc., which supplies machines to the construction and mining industries, paced gains with a 5.1 percent rally.
By comparison, industries less dependent on growth, known as defensives, didn’t fare as well. The S&P 500 Telecommunication Services Index, which includes AT&T Inc., fell 1.1 percent last month. A utilities measure tracking companies such as Southern Co. dropped 0.2 percent and is trading 6.3 percent below its four-year high on July 30.
“Stocks are going to go up and it’s a mistake to be too bearish here because the economic improvements are real,” Jeffrey Saut, who helps oversee about $350 billion as chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said by phone on Jan. 4. “A lot of the hedge funds were short because they were worried about Europe, the fiscal cliff and the disfunctionality of the government. But we’re overcoming these issues, so you better cover your shorts even if you get whipsawed.”
The ratio of bullish to bearish investments in U.S. equities has increased to 14.2 from a 2012 low of 11 in June, according to London-based Markit, which provides research on short sales and stock lending.
Americans missed out on almost $200 billion of gains as they drained money from stocks in the past four years. Assets in equity mutual, exchange-traded and closed-end funds rose about 85 percent to $5.6 trillion since the bull market began in March 2009 through September, trailing the S&P 500’s 94 percent surge, data compiled by Bloomberg and Morningstar Inc. show.