Since I seldom am the bearer of upbeat news, I thought I’d pass along the cheery forecast from market strategists at Lehman and Deutsche Bank, namely, that the Standard & Poor’s 500 index will have its best six months since the second half on 1982 in the second half of 2008.
I happen to remember that period. The markets had been though a grinding loss of faith in securities, not just stocks. Philip Brothers, a commodities broker, had bought the storied Salomon Brothers; Goldman had done a reactive deal, a purchase of a commodities trader, J. Aron, which turned out to be a horrifically bad deal on any cashflow analysis (commodities went promptly into retreat shortly after the deal was concluded; J. Aron was soon hemorrhaging cash and pink slips) but in the very long term helped Goldman’s strategic position. The few fixed corporate bond deals being done were at coupons of over 15%. Similarly, very few equity issues were being done (who would want to sell stock at such low multiples?).
It on a specific day in August that thinks turned, I think August 12, that word went through Goldman like wildfire that the bear market was over. Sadly, I don’t recall the trigger for this change in sentiment (it preceded Volcker’s relenting on his dose of high interest rates, which occurred in October 1982).
The Bloomberg piece is skeptical of these forecasts, as am I based on my recollections of the reference period. Markets and sentiment are no where near as ground down as they were then. The S&P 500 earnings multiple was around 10. And given how weak the economy had been, there was ample room for both earnings improvement as well as multiple expansion (click to enlarge).
But hey, I could be all wet. And another Bloomberg story points to a bullish indicator: record short interest. High levels of shorting means an improvement in stock prices can gain strong momentum from short covering.
Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor’s 500 Index will gain the most in 26 years during this year’s second half. That isn’t going to happen, if history is any guide.
The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.
Even if that happens, it may not be enough. In 2001, the last time profits fell as much, they then had to climb for three straight quarters before stocks rebounded. Analysts’ earnings estimates for this year still represent a decline from 2006 levels, making the strategists’ optimism harder to justify, investors say.
“If they’re accurate, I’ll give them a big kiss,” said Randy Bateman, who oversees $15 billion as chief investment officer at Huntington Bancshares Inc. in Columbus, Ohio. “I don’t think those are very realistic figures.”
The S&P 500 dropped 1.2 percent last week to 1,262.90, coming within a percentage point of a “bear market,” defined as a 20 percent plummet from its peak in October. Based on the index’s closing price of 1,280 on June 30, the average strategist forecast of 1,515 by year-end calls for the biggest rally of any second half for the S&P 500 since Ronald Reagan was in the White House in 1982….
Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank’s New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.
Ian Scott, Lehman’s global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent.
The S&P 500’s rebound “is going to be one of the greatest roars we’ve seen,” Bianco said. “The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen.”
Strategists’ annual forecasts have been off by an average of 14 percentage points since 2000, according to data compiled by Bloomberg. They haven’t projected an annual decline in at least eight years
At the start of the year, strategists told clients to expect an average 11 percent advance in the S&P 500 in 2008 to 1,634, Bloomberg data show. The measure has dropped 14 percent so far.
“A monkey with an abacus is probably better at the end of the day,” said Peter Sorrentino, a Cincinnati-based senior money manager at Huntington Asset Advisors, which oversees $16.7 billion. “To read the strategists’ input is intriguing and thought-provoking, but at the end of the day, you’d better have your own tools. We’re nowhere near as optimistic as some of the forecasts.”…
Abhijit Chakrabortti, chief global equity strategist at Morgan Stanley, wrote in a report today that the S&P 500 is still too high relative to earnings and may decline as much as 8.9 percent to 1,150 if inflation accelerates. Merrill Lynch & Co.’s Richard Bernstein expects the index to rise to 1,400 in the next 12 months, according to a July 3 note to clients…
Profits at S&P 500 companies fell for three straight quarters and are estimated to have dropped 11.2 percent in the second quarter, according to data compiled by Bloomberg. Four consecutive periods of declines would be the most since the last recession in 2001….
“Earnings in a lot of sectors should look good,” said James Swanson, Boston-based chief investment strategist at MFS Investment Management, which oversees $204 billion. He expects the S&P 500 to gain 23 percent to 1,580 by Dec. 31. “Financials should be making money again. There’s certainly a lot of wreckage now, but there are bargains out there.”…
Shares may still drop even after earnings recover, which is what happened during the last recession. The S&P 500 lost 13 percent during the five quarters of profit declines between 2001 and 2002. In the last three quarters of 2002, when earnings increased again, the index fell a further 23 percent.
“There’s always going to be ebbs and flows in the economy, but we believe that this is a start of a significant bear market,” David Tice, founder of the $1.2 billion Prudent Bear Fund, said on Bloomberg Television. “We are going to pay the price for it with much lower stock prices.”