US stocks are beating every major asset class for the first time in 17 years even as economic growth weakens and profits rise at the slowest rate since 2009.

The Standard & Poor’s 500 Index has rallied 14 per cent in 2012, beating Treasuries, corporate bonds, commodities, the dollar and equities in Asia and Europe, data compiled by Bloomberg show. The last time that happened, in 1995, the S&P 500 was posting the biggest annual advance of the last five decades. With a price-earnings ratio close to today’s level, the index gained another 93 per cent in the next 2 1/2 years.

For all the concern about unemployment and manufacturing growth, the best assets this year remain US companies after unprecedented steps by the Federal Reserve to support growth. Forecasts for a rebound in the US economy and the central bank’s pledge to keep interest rates near zero for years convinced bulls the S&P 500 will extend gains. Bears say political gridlock will drag down prices after monetary stimulus wears off.

“We see good earnings growth and improving economic outlook, we see good equity valuations and easy monetary policy, we see skeptical investors and low positioning in equity assets,” said Max King, a multi-asset strategist at Investec Asset Management in London, which oversees $100 billion. “This is a major green light for equities and the fact that people don’t see it, is great.”

Treasury returns: Treasuries have returned 3.3 per cent in 2012, compared with 9.9 per cent for US investment-grade corporate bonds and 14 per cent for high-yield debt, based on Barclays Plc index data. The S&P GSCI Index of 24 commodities advanced 1.7 per cent, while the Dollar Index that measures the US currency against those of six trading partners weakened 0.7 per cent.

The S&P 500 gained 0.3 per cent last week to 1,433.19 following better-than-estimated data on US housing starts and as earnings from Citigroup Inc., Honeywell International Inc. and Mattel Inc. topped forecasts. Including dividends, the index is up 16 per cent this year, led by PulteGroup Inc., Sprint Nextel Co. and Gap Inc., which have risen more than 96 per cent.

The bull market will last another year as individuals regain confidence and return to equities after withdrawing money since 2007, according to Laszlo Birinyi, the president of Birinyi Associates Inc. Investors have pulled about $100 billion from US stock funds this year and added $250bn to bond funds, according to data from the Investment Company Institute in Washington.

Birinyi said in an October 17 phone interview. “People are realising that the stock market is not all that bad. It’s been telling us that the economy and companies are in better shape than people think.”

The Fed initiated a third phase of so-called quantitative easing on Sept. 13 to purchase $40 billion of mortgage-backed securities per month and said that it will keep interest rates near record lows at least through mid-2015.

The US recovery is the weakest post-recession expansion since World War II, according to Bloomberg data, and the IMF forecasts gross domestic product around the world will expand 3.3 per cent this year, the slowest since the 2009 recession.

Bears say the support of central banks can only do so much. They also note that the so-called fiscal cliff, the more than $600 billion of tax increases and spending cuts that are set to kick in automatically next year unless Congress breaks a deadlock, is weighing on investors deciding which assets to buy.

Moving Up: “I’d rather have things be moving up as a result of fundamentals than a very aggressive central bank,” Jason Brady, a managing director at Santa Fe, New Mexico-based Thornburg Investment Management Inc., which oversees about $83 billion, said in an October 18 phone interview. “You’re looking at a bunch of companies in situations where there are a lot of headwinds and a real difficulty of getting growth.”

Intel Corp. and International Business Machines Corp. reported results last week that showed the global economic slowdown is prompting companies to curtail technology spending. The stocks have fallen every day since releasing quarterly earnings, with Intel down 2.5 per cent in the first trading session and IBM losing 4.9 per cent, the biggest loss since October 2009.

General Electric Co., the biggest maker of power-generation equipment, fell 3.4 per cent on October 19 when it reported revenue that missed analyst estimates and cut its 2012 sales target. It was the second quarter in a row of lower-than-projected sales, data compiled by Bloomberg show.

While the unemployment rate unexpectedly declined to 7.8 per cent in September, payroll growth slowed, a Labour Department report showed on October 5. Companies added 114,000 workers last month after a revised 142,000 gain in August, according to government data.

Reports on the world’s largest economy beat forecasts last month. US manufacturing unexpectedly expanded in September after three months of contraction while service industries grew the fastest in six months, data from the Institute for Supply Management showed this month.

“The negative case is always more compelling,” Birinyi said. “It’s always more rational because the negative case is about now. The stock market is about tomorrow.”

Wall Street strategists tracked by Bloomberg predict the S&P 500 may surpass its all-time high next year. The benchmark may end 2013 at 1,585, according to the median forecast of five analysts polled by Bloomberg News, 1.3 per cent higher than a record in October 2007.

The improvement in the US economy and possible easing of Europe’s debt crisis easing made Treasuries less attractive than equities this year. The yield on the benchmark 10-year bond fell to 1.38 per cent on July 25, according to Bloomberg data, a record low. It finished last week at 1.76 per cent, from 1.88 per cent at the end of 2011.

However, Barclays Plc’s 10-20 Year Treasury Total Return Index has climbed 3.3 per cent this year. The Barclays Municipal Bond Index has advanced 6.1 per cent, while a gauge of Treasury inflation- indexed notes known as TIPS added 6.3 per cent.

Debt issued by companies, loans and hedge funds also trailed stocks. A Barclays index of investment-grade US corporate debt has gained 9.9 per cent in 2012 and a gauge of high-yield credit advanced almost 14 per cent. The S&P Leveraged Loan 100 Total Return Index is up 9.7 per cent this year, while the HFRI Hedge Fund-Weighted Composite Index added 4.8 per cent. —Washington Post/Bloomberg