The newest issue of our quarterly newsletter, Portfolio Insights, is now available electronically.  You can click the image on the right to view the issue.

Perhaps my favorite article is the centerfold graphic that charts the market’s price movements and highlights key event in 2010.

One theme that was prevalent throughout this issue was the belief that the stock market looks vulnerable to some downside weakness.  Sentiment is very bullish, which is typically a signal of trouble ahead.  Of course, equities may not endure much pain as long as the Fed keeps pumping liquidity into the system.

Despite the Fed’s unprecedented monetary policy, stocks are not a screaming buy.  In the last issue of Portfolio Insights we noted that the dividend yield on the S&P 500 was higher than the 10-year Treasury.  This made stocks attractive in our view.  This relationship no longer holds as the S&P 500 yields 2.2% and the 10-year Treasury yields 3.3% (as of 12/31/10).  In theory, dividend yields should be higher than bond yields in a fairly valued market because the higher yield is supposed to compensate the investor taking on extra risk.

Another measure of value is the cyclically adjusted P/E ratio – also known as the Shiller P/E ratio – which shows the market is trading at 22.7 times earnings, much higher than the normal 14 to 16 times earnings.  However, the Shiller P/E is a much better “buy indicator” than “sell indicator” because bottoms are usually sharp, whereas tops often take time to play out. 

This is an important concept.  Because markets often stay overvalued for long periods of time, there is also some risk in staying on the sidelines.  For this reason, investors should maintain a disciplined, long-term approach to investing that focuses on asset allocation, rather than timing the market’s moves.

A myriad of catalysts could cause sentiment to turn negative in 2011, but Acropolis continues to keep a disciplined approach to managing portfolio risk while attempting to find the best risk-adjusted value for long-term investors.

I hope you enjoy the newsletter.  You can sign up here to receive an electronic copy of the newsletter every quarter.

Have a great day!

Peter Lazaroff, Investment Analyst

www.acrinv.com

St. Louis, MO