Now, investors are turning their attention to the first year of the 2010s wondering if stocks can continue their bull run.
Despite the big rally, there is still trepidation among investors, as questions remain about whether the stock market and the economy are truly on a sustainable path to recovery. Two burst bubbles in the past 10 years — the tech-stock bust earlier this decade and the more recent popping of the real estate and credit bubble — have shaken the faith of many investors.
To get a sense of where financial markets may be headed, USA TODAY held its 14th annual Investment Roundtable earlier this month, which was attended by top mutual fund managers and investment strategists, including a well-known Wall Street bear.
The general consensus of the five panelists is that the recession is over and that a recovery in markets and economies around the world is underway but that risks remain. The most upbeat about the outlook for stocks in 2010 was David Bianco, head of U.S. equity strategy at Bank of America Merrill Lynch. He forecasts a 15% gain for the broad market on the belief that global economic growth will boost the profitability of big U.S. companies that do a lot of business overseas.
That upbeat view was not shared by David Tice, chief portfolio strategist for bear markets at Federated Investors. Tice, who believes stocks are still in a secular, or long-term, bear market, is calling for a drop of 40% for stocks. "It is time for individual investors to store their nuts," says Tice, whose ultrabearish views are not shared by Federated's chief investment officer, who projects gains of almost 20%. (Last year, Federated bought Tice's Prudent Bear funds, which profit when stocks fall.)
Unlike last year, when forecasters either chose an Armageddon scenario or a bounce-back thesis, the outlook for 2010 has far more nuances. "What we have now is a more muddled picture, but it is a nicer picture," says Abby Joseph Cohen, senior investment strategist at Goldman Sachs. "Most people are taking the point of view that the period of maximum risk has passed, but we do have risks ahead. It is more normal, but it is not normal."
Brian Rogers, chairman and chief investment officer at T. Rowe Price, expects investors to keep shifting money out of risk-free assets that offer virtually zero return in favor of riskier assets such as stocks: "I don't think this is a bear market rally."
The ride in 2010 could be bumpy, says Dan Chung, CEO and chief investment officer at Alger Funds. "The market is due for a correction," he says. "But the correction is one that should be bought."
MARKET OUTLOOK: Can the bull keep charging?
After a scary nose dive in March, stocks are up more than 60%, the economy is showing signs of life and job losses are shrinking. Is it safe for individuals to come out of their investment bunkers?
Abby Joseph Cohen, Goldman Sachs: It would appear that the U.S. recession is over, and while economic growth is likely to be slow in 2010, we don't expect to go back into recession. We think U.S. GDP growth continues and inflation is not likely to rear its ugly head over the next several months. That is a reasonably good environment for stock market investors.
But I would add one thing: It is not just one decision. If you come back into stocks, what do you get out of? With interest rates at a generational low, there is now some risk in the bond market, not necessarily today or this week, but over the next several months or year or two. If the global economy continues to grow and central bankers back away from the significant monetary policy ease, interest rates may go up, which means bond prices go down. So individual investors who have been avoiding stocks and going into bonds over the last 18 months really have two decisions to make.
For a different take, let's turn to David Tice, the chief portfolio strategist for bear markets at Federated Investors.
David Tice, Federated Investors: I am likely to be the most bearish of the panelists. I don't necessarily like being the curmudgeon, but it is my role because I believe strongly in my premise.
And your premise is?
Tice: This is a rally off of a very oversold condition. It looked like the whole system was going to implode. We have come back from that. We have thrown trillions of dollars in stimulus, bailouts and backstops at the problem. We have slowed the decline, but we still are not generating very much growth. Even though layoffs are slowing down, new jobs are not being created yet.
Everybody is looking for the silver lining in all the economic statistics, but frankly we see a lot of problems out there. The major problem is that people are trying to analyze it like a garden-variety recession. But this is a credit collapse. We now have asset deflation; we have credit contraction. This is similar to what happened in the U.S. in the 1930s (during the Depression) and Japan in the late 1980s (which resulted in a "lost decade"). Therefore, we have to look at it differently. I believe the stock market is 50% overvalued, and I am looking for a 40% decline in 2010.
It's the time to store your nuts, the time to think about preserving capital rather than trying to get back in the stock market and make a lot of money.
Is it riskier to be in the stock market or out of it?
Brian Rogers, T. Rowe Price: There is always risk in stocks. At the same time, I think we have turned the corner. Economists will probably concede that the recession ended sometime in June or July. A lot of the excesses David talked to in terms of asset deflation are slowly on the mend. Consumers are (repairing their finances) slowly.
I don't see big excesses in U.S. stocks. There are probably excesses in long-term Treasury bonds and high-yield bonds, where a lot of money flowed in. Perhaps animal spirits are returning to emerging markets. There are some signs of mild or early irrational exuberance out there.
But in terms of stocks, I think the outlook for the next year is pretty good, primarily because I see reasonable valuations, decent earnings recovery and an awful lot of cash looking for a home. There is $3 trillion-plus sitting in money market funds earning next to nothing, and some of that money is going to move into stocks.
I think there will be a continued flow out of risk-free assets into riskier assets. I am fairly positive on stocks, while acknowledging that we have had this incredible move since March. At least in the short term, the stock market is probably a little ahead of the economy, which is normally the case. We will see some ebbing and flowing, but I suspect returns will be positive next year. Five percent to low-teens gains, as a guess.
Despite tough times for U.S. consumers, won't the big stocks in the S&P 500 index benefit from growth abroad, especially in emerging markets?
David Bianco, Bank of America Merrill Lynch: A big part of our thinking is the S&P 500 is not (over)exposed to consumer discretionary spending. It's more exposed to the global economy, and different types of end markets like business spending and commodity production.
Our bullish view (year-end S&P 500 target of 1275, a 15% gain over Friday's close of 1106) is also built upon the belief that the U.S. economy has stabilized and will grow moderately over the next couple years in an inflationless recovery. These are the reasons why we are advising clients to move back toward their strategic stock benchmarks and reallocate (more money to stocks). Don't wait for a sizable pullback. We don't think there will be one.
A couple years from now, if not a lot earlier, people will look back and say, "I missed out on an opportunity of a lifetime because I was worried about this, that and the other thing." Yet life goes on. Things are improving, slowly. And for the S&P 500, the future does look bright.
Dan, what's your view?
Dan Chung, Alger Funds: I remain long-term positive. But the market is due for a correction after the tremendous rally off the March lows. I don't think it would be at all shocking to get a 10% decline in the March-to-August period. The correction is one that should be bought, even though it's going to be scary for a lot of investors.
What will happen, in my view, is economic growth is actually going to be stronger than expected, as we saw last week with the November jobs loss number (coming in at a loss of 11,000, well below what economists expected). I think those kinds of numbers will continue.
I don't think we retest the lows. I do think we are at the beginning of a new bull market. In the end, you want to be invested in the stock market. You want to save whatever dry powder you have and buy the dips.
Are stocks priced right? Or just plain pricey?
The bear market erased nearly 60% of the stock market's value, but then came the 60% rebound. Based on 2010 profit estimates, are stocks undervalued, fairly valued or overvalued?
Rogers: It is very hard to say that U.S. stocks are (in a) bubble. The market's price-to-earnings ratio, or P-E, is 15-ish. Is that really cheap? No. Is that overextended? No. With a decent earnings rebound continuing, there is decent upside for stocks. This is a broad range, but I guess stock gains next year will be 5% to low teens.
Chung: The trailing 12-month P-E, based on consensus profit estimates of analysts tracked by Thomson Reuters, is (in line) with the historical median. Given we are in an improving economy and coming off a very low trough in earnings and price levels, you could argue the P-E should be higher.
The 2010 estimate of around $75 ($77.70, according to Thomson Reuters data released Friday) for S&P 500 earnings are about right. That implies a market trading at around 14 times 2010 earnings. That is definitely too low. Even if growth is slow, I think we are in recovery mode. To me, the numbers show the market is slightly undervalued.
Cohen: Based upon our 2009 analysis, when we take a look at seven or eight different valuation models, things like earnings, cash flow, return on equity, revenue data and so on, the market is priced about where it should be. That doesn't mean that there aren't some stocks that are underpriced and others overpriced.
Our view for 2010 is that growth will continue. We don't see a W-shaped recovery. We don't see a decline back to recession. We think there will be moderate 2% to 2.1% GDP growth and profit gains commensurate with that. So we will probably be below consensus on GDP and profits. Even so, if we are correct, that growth continues, inflation stays under reasonable control, and interest rates don't go up notably, then valuation is appealing for 2010.
Bianco: Abby and I agree. The market is fairly valued on the earnings generated right now. If you believe the U.S. and world economy continues to grow, the market is significantly undervalued based on our 2010, 2011 and 2012 earnings forecast.
Does anyone think the market is overvalued?
Tice: Yes, I believe the market is more than 50% overvalued. I am looking for at least a 40% decline for the S&P 500 in 2010. Investors should be very, very careful about looking at (and trusting) analysts' and strategists' expectations for 2010 and 2011 earnings. Remember, most of the analysts and almost all the economists completely missed this credit dislocation that we had in '08 and '09.
POTENTIAL PITFALLS
What could spark a correction?
Rogers: As we've seen over the years, left-field events can come out of nowhere to surprise us. I'm sure we will see some of that next year. Whether it is a double-dip recession, or something crazy going on in the Middle East, there will be scary things that will shake investor confidence.
Some pundits say the liquidity-driven rally will end badly. Why all the angst?
Tice: We have so many risks. Look at the third-quarter GDP growth of 2.8%. (Nearly all of that) came from the government stimulus package, cash for clunkers, etc.
We still have one in seven Americans with a mortgage either in foreclosure or in arrears. We have one in six Americans either unemployed or working part time.
Credit is still tightening. Things are bad in America. We created a debt bubble. The economy grew because people used their houses as ATMs. We responded to this crisis by adding a spectacular amount of new debt in the system.
Cohen: I am concerned about the fiscal situation at the state and local level. State and local governments don't have the ability that the federal government does to run deficits for more than one year, and that is why you see the rubber hitting the road right now in a variety of states, including Michigan and California.
I think that this is going to be one of the big issues from both a consumer and political standpoint in 2010. States will have to either raise taxes or reduce spending. (That may force them to) fire workers, such as public-safety employees, teachers and construction workers who get put to work on infrastructure projects.
David, what worries you?
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