Towards the end of the year you can get a good handle on Wall Street's expectations for the year to come as analysts and strategists trot out their forecasts. According to data compiled by Birinyi and Associates, the average price target for the SPX in 2010 of 9 major firms on Wall Street is 1222 which represents a moderate gain of 9.5% from current levels. If 2009 represented the first year of a new cyclical bull market (which I believe) then this target may be too low because the second year has typically shown a stronger follow through.
They say history doesn't repeat but it often rhymes.....
In 2003 the market started off poorly but made a bear market bottom in March....the same thing happened in 2009.
2003 showed a 26% gain in the SPX with it ending the year at 1111. In 2009 the SPX showed a 23% gain ending the year at 1115.
By the end of 2003 the fed funds rate was 1% and the 10 year bond yield was 4.26%.
At the end of 2009 the fed funds rate was 0% and the 10 year bond yield was 3.84%.
(the funny thing is that by the end of 2004 the fed funds rate rose to 2.25% and the 10 year bond was about 4.16% which was essentially the same level as it was at the beginning of the year! I remember how this baffled the hell out of everyone....will the same thing happen this year if ST rates go up?...I think yes!).
The 12 month forward EPS estimate for the SPX at the end of 2003 was about $65 giving the market a forward P/E of 17 (and the market still went up another 40% over the next 3.5 years).
The 12 month forward EPS estimate for the SPX at the end of 2009 was $77 giving the market a forward P/E of only 14.
Fears of a double dip recession was evident during the recovery 6 years ago and again now (I would say even more so this time around).
What are the differences between 2003 and 2009? The main one would have to be the economy. The economy had turned the corner more so in 2003 vs. 2009. In 2003 GDP growth was mildly positive in Q1 and firmly positive the rest of that year. Jobs were being added in a significant and consistent manner starting in the summer that year. In 2009 we saw the economy bounce back in the 2nd half of the year from a large GDP quarterly losses in q1 and q2 to modest growth in q3 (q4 is still unknown). 2009 also went from heavy job losses to start the year to essentially break even by the end.
Earnings lead the economy and ultimately drive job creation/losses. Since earnings had already stabilized and recovered modestly by the end of 2002, the economy was already poised to recover in 2003 whereas at the start of 2009, earnings were still dropping. Earnings then bottomed and turned up sharply around springtime which is why the economy was weaker in 2009 vs. 2003...but the economy has recovered to the point whereby job losses are about to turn to gains for the first time in 2 years...we will find out if that's going to be the case this Friday.
The "dumb money" as represented by your typical retail investor/trader is still as skeptical and bearish as they were 6 months ago...if not more. From what I can tell, the typical retail investor took a beating in 2009 despite the market being up 23%. What does that tell you? It tells you the dumb money has been betting against the market almost the entire way up. The bearish group think out there is uncanny.
Here's a list of the concerns that people have about the market
1. commercial real estate is the next shoe to drop
2. the economy is being propped up by government stimulus/incentives. Once they end the economy is toast
3. deficits are too high
4. a big wave of mortgage rate resets is coming
5. consumers are deleveraging
6. Interest rates are going to rise and therefore put a brake on this economic bounce
I'm sure I missed a few more.
Let me tell you something about these concerns....they are WELL KNOWN are likely already incorporated into the market. You can argue with me about this, but since I hear so much about these "time bombs" by typical retail ilk the market must also be well aware of them. Given the solid uptrend of the market it is saying 1 of 3 things regarding the above issues a) the issue won't nearly be as big of a problem as it's cracked up to be b) the issue won't be a problem at all or c) the issue is not going to be major problem for quite some time yet.
I remember in 2003 a huge concern out there was how company pensions were massively underfunded and that this was going to be a huge drag on growth as companies had to divert capital to shoring up their pension plans...no dice there at all for any bears who pinned their hopes on that.
Now, there could always be knee-jerk reactions to bad news or fears in regards to any of the above well known issues that take the market down momentarily. For instance, if the fed decides to raise rates earlier than people expect (consensus on the street is for sometime in the second half of 2010...June at the earliest) then it could be the catalyst for a dip. We saw for example, the market do a knee-jerk sell off on Dubai and Greece concerns.
The bottom line is this....economic momentum has reversed course in a major way from deep negative levels in early 2009 with plenty of room to improve further showing no signs of abating. Leading economic drivers like earnings growth, monetary condition and fiscal spending are still quite bullish for the market, the typical retail investor is still skeptical/bearish and valuations are reasonable (especially in this low interest rate environment) despite the big rebound that already took place. All of this suggests another good year for the market in 2010....but here's a little monkey wrench to throw into this bullish equation....years ending in 0 have ALL been negative since 1910!!! (correction: 1950 and 1980 were actually very good years and 1970 was flat depending on which index you use).
do-do-do-do...do-do-do-do!
Great post!
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