Consensus Bond Allocation @ 31%

Below we highlight the consensus strategist recommended bond allocation since 1997. At the moment, Wall Street strategists are collectively recommending a 30.5% weighting in bonds.

Prior to the run-up in Treasuries during the financial crisis, the recommended bond weighting fluctuated from 15%-20%. As bond prices rallied, strategists followed them higher by increasing their recommended weighting.

As shown in the chart, the recommended bond weighting peaked well after the long bond peaked in December 2008, and the weighting has been drifting lower throughout the current bull market in stocks.

Over the last few weeks, the recommended bond weighting has remained right around 30%. The long bond itself is currently trading in a range that it typically traded in during the '03-'07 stock market rally, but at 30%, the recommended weighting is about 10 percentage points higher than it was during that time.

Have analysts become more conservative in general, or will the recommended weighting continue to fall as long as the market goes up?

Chart and analysis courtesy of Bespoke Investment Group

S&P 500 Historical Sector Weightings: 1990 - 2010

Above are the historical sector weightings for the S&P 500. Technology currently has the biggest weighting in the S&P 500 at 19.2%. This is the highest weighting the Tech sector has had since the Internet bubble burst in 2000.

After falling all the way down to just 8.9% at the March 2009 lows, the Financial sector's weighting in the S&P 500 now ranks 2nd at 14.4%.

Health Care, Consumer Staples, Energy, and Industrials are the other 4 sectors with a weighting of more than 10%. The Consumer Discretionary sector is close to 10% at 9.8%. From 1998 to 2007, the Consumer Discretionary sector was bigger than the Consumer Staples sector.

When the bear market hit in 2007, Consumer Staples overtook Consumer Discretionary, but the spread has tightened to about two percentage points recently. If the bull market continues, we'll likely see Discretionary overtake Staples once again.

While the Materials sector gets a lot of attention in the media, especially because it has the gold stocks, it's important to remember that it only makes up 3.5% of the S&P 500. The Utilities sector is even bigger than Materials.

Chart and analysis courtesy of Bespoke Investment Group

GDP Grows at Fastest Pace in 6 Years

While the ultimate pace of the economic rebound continues to be debated, GDP in the 4th quarter of 2009 rose +5.7% (expectations were for growth of +4.6%), which was the fastest pace in 6 years. Granted, this growth follows an even bigger decline of -6.4% in the first quarter of 2009, but at least it's a start.

Judging by the performance of equities in the fourth quarter, and the earnings reports we've seen so far, we already knew the fourth quarter was strong, the big question is whether or not this growth will continue in Q1.

Based on what we've seen so far in terms of guidance, companies seem to have a positive outlook.

Chart and analysis courtesy of Bespoke Investment Group

Country P/E Ratios and GDP Growth

Many investors use the PEG Ratio as a valuation tool these days because it puts a company's growth prospects into perspective along with the widely followed price to earnings ratio. The PEG ratio is the P/E Ratio over the Growth Rate, and a PEG of less than one is generally considered good.

In this regard, Bespoke created "PEG" ratios for a number of countries using the P/E ratio of each country's main equity market index along with 2010 estimated GDP growth rates. Just as with stocks, the lower the country PEG, the more attractive.

As shown, India has the best PEG out of the countries we analyzed. It has a P/E ratio of 26.19 and estimated 2010 GDP growth of 8%. While its P/E isn't as low as a lot of countries, its growth rate is very high. China ranks 2nd with a PEG of 3.66.

The U.S. ranks in the middle of the pack with a P/E of 24.53 and estimated GDP growth of 2.6%.

At the bottom of the list sits Switzerland, Italy, and the UK, while Australia, Japan, and Spain have negative PEGs due to either a negative P/E Ratio or negative estimated GDP growth.

Chart and analysis courtesy of Bespoke Investment Group

VIX At Lowest Level Since 2008...

Now that the VIX Index is at its lowest levels since May 2008, and down nearly -80% from its record high in late 2008, there is a growing concern among some investors that there is not enough fear in the marketplace.

  

As the chart above indicates, the current level of 17.6 is lower than the long-term average of 20.3 since 1990.

However, during the mid-nineties and the middle part of this decade, which were both good periods for equity investors, the VIX not only traded at and below current levels, but it also remained at those levels for several years.

While the VIX's decline over the last year indicates that investors are not as fearful as they were a year ago, can you blame them for not being so?

While conditions haven't quite returned to normal, they are a lot closer now than they were then.

Chart and analysis courtesy of Bespoke Investment Group

High-Yield Bonds Continue To Outperform

Over the past month or so, the only area of the bond market that has done well is junk.

  

Both Treasuries and investment grade corporates have struggled, while high yield bonds have continued to surge.

Below we highlight a 6-month performance chart of the high yield bond ETF (HYG) and the investment grade corporate bond ETF (LQD).

As shown, HYG is up +18.2% over the last six months, while LQD is only up +5.5%.

You can see a clear split in performance (shaded in gray) at the start of December, where HYG continued to trade higher and LQD began to trade lower.

Chart and analysis courtesy of Bespoke Investment Group