The average 2009 year-end S&P 500 is 1,056, or 16.9% above the S&P's year-end price of 903.25.
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Strategists See 17% S&P 500 Rise After Saying ‘Buy’ (Update3)
By Lynn Thomasson
Jan. 5 (Bloomberg) -- The same Wall Street strategists who told investors to buy stocks in the worst year since 1937 are even more bullish than a year ago, predicting the Standard & Poor’s 500 Index will rise 17 percent.
UBS AG, JPMorgan Chase & Co. and Deutsche Bank AG say the Federal Reserve’s decision to cut interest rates to as low as zero percent will help revive the U.S. economy and drive investors back to equities. Cheaper fuel prices and more than $850 billion in spending on roads, bridges and health care will send stocks higher, the strategists said.
Even if they’re right, the S&P 500 would end 2009 at 1,056, 28 percent below where the benchmark index for American equities started in 2008 and 35 percent lower than where the analysts said it would be now, based on the consensus of 11 strategists surveyed by Bloomberg News. Some of the biggest investors are growing more optimistic as the S&P 500 advanced 24 percent since reaching an 11-year low on Nov. 20.
“Equities usually find a bottom about halfway through a recession,” said Binky Chadha, the New York-based chief U.S. equity strategist at Deutsche Bank who predicted the S&P 500 would climb 12 percent in 2008 and expects a 26 percent surge this year. “If policy gets it right, we should find a bottom and start to turn around. And if that happens, then it’s time to buy stocks.”
$29 Trillion
Wall Street analysts lost credibility in 2008 when none predicted a down year and the average forecast was for a gain of 11 percent, according to data compiled by Bloomberg. Instead, the S&P 500 tumbled 38 percent to 903.25 and $29 trillion was erased from global markets. The projections for this year would represent the best annual performance since 2003, when the S&P 500 climbed 26 percent.
U.S. stocks fell for the first time in four days as concern that a slump in corporate profits will stretch into 2009 overshadowed speculation the government will revive the economy with tax cuts. The S&P 500 slipped 0.5 percent to 927.45 today, halting its longest stretch of gains since November.
Concern that stock losses will deepen remains elevated even after falling from record levels in October and November.
The Chicago Board Options Exchange Volatility Index, which measures price swings, ended 2008 at 40, up 78 percent from a year ago and more than triple the level at the start of 2007.
TED Spread
The Libor-OIS spread, a measure of cash scarcity, closed 2008 at 121 basis points after averaging about nine basis points in the year before credit markets started freezing up in August 2007. The difference between what the U.S. government and banks pay to borrow for three months, the so-called TED Spread, is about three times higher than before the credit crisis started, according to data compiled by Bloomberg.
Treasuries returned 14 percent last year, the most since 1995, according to Merrill Lynch & Co. indexes. Investors sought the relative safety of government debt as losses and writedowns at the world’s biggest financial companies rose toward $1 trillion and the economies of the U.S., Europe and Japan fell into the first simultaneous recessions since World War II.
“People have been telling the investing public for the past six months to stay the course or buy this great opportunity, and it’s turned out to be a liability,” said Randy Bateman, who oversees $15 billion as chief investment officer of the asset management unit of Huntington Bancshares Inc. in Columbus, Ohio. “Any outlook right now is subject to a great deal of skepticism.”
‘All Available Tools’
Stocks rallied at the end of the year as the Fed said it will “employ all available tools” to revive the economy and President-elect Barack Obama pledged to boost growth through the biggest infrastructure investment since the 1950s.
The combination of government stimulus and oil’s 69 percent drop from its July record of $147.27 a barrel may pop the “bubble of pessimism” toward stocks, according to David Bianco of UBS, Wall Street’s biggest bull.
“The consensus outlook for 2009 is a full year of gloom,” Bianco, 33, wrote in his annual market outlook last month. “We believe 2009 will bring signs of a dawn in confidence with the first faint light appearing earlier than most investors expect.”
The S&P 500 began recovering an average five months before recessions ended in 1975, 1982, and 1991, data compiled by Bloomberg show.
‘Greatest Roars’
Bianco predicted 12 months ago that the S&P 500 would climb 16 percent in 2008, and stayed bullish after the subprime mortgage meltdown spurred the collapse of Bear Stearns Cos., then the fifth-largest U.S. securities firm, in March. He said in a July interview with Bloomberg News that the rebound in stocks during the second half of 2008 would be the “one of the greatest roars we’ve seen.”
UBS’s New York-based equity strategist now expects the S&P 500 to reach 1,300 this year as share prices cheap relative to earnings become irresistible. Last year’s slump left S&P 500 companies valued at an average 12.9 times operating profit, near the lowest since at least 1998, monthly data compiled by Bloomberg show.
The S&P 500’s dividend yield may be the “most compelling” signal that stocks are inexpensive, Abhijit Chakrabortti, Morgan Stanley’s New York-based head of global equity strategy, wrote Nov. 25. He expects the index to advance 7.9 percent this year.
The dividend payout for companies in the index climbed above the yield on the 10-year U.S. Treasury note for the first time in 50 years in November and is now 3 percent. That’s 0.67 percentage point more than the yield on 10-year notes, data compiled by Bloomberg show.
‘Staging a Recovery’
JPMorgan’s Thomas Lee says the 47 percent drop in gasoline prices last year to an average $1.62 a gallon, according to AAA, combined with Obama’s plan for stimulating growth may revive consumer spending in the second half of 2009. Retailers are among the New York-based bank’s “top picks” for 2009. The S&P 500 Retailing Index trades at 12.5 times the earnings of its 27 companies, about half the average ratio this decade.
“Every year’s a new year,” said Lee, 39, who expects the S&P 500 to rise to 1,100. “One of the big hurdles is obviously going to be coaxing investors back. As we exit ‘09 we think the economy is staging a recovery,” he said in a telephone interview.
Economic Data
Economic statistics give little indication that a recovery is imminent. Consumer confidence sank in December to the lowest since records began in 1967, raising the risk that spending will weaken in 2009, data from the New York-based Conference Board showed last week.
Gross domestic product will contract in the first half of this year, while household spending is expected to fall 1 percent in 2009, the biggest drop since the aftermath of the attack on Pearl Harbor, according to Bloomberg surveys of economists.
Corporate profits have fallen for seven quarters, according to the U.S. Bureau of Economic Analysis. Should earnings drop through the first half of 2009, as analysts surveyed by Bloomberg project, it will be the longest stretch of decreases since the government started tracking quarterly data in 1947.
The decline in corporate profits will probably push the S&P 500 back to its 11-year low of 752.44, according to Barclays Plc’s Barry Knapp, the only forecaster calling for the index to drop. He says the index will fall 3.2 percent.
‘Little Bit Early’
“We do think there will be an economic recovery in the back half of the year,” Barclays’ New York-based chief U.S. equity strategist said in a telephone interview. “You can do OK with the equity market this year, it’s just a question of when you commit. Right now, it’s a little bit early.”
The biggest bears at the start of last year, Morgan Stanley’s Chakrabortti and Merrill Lynch & Co.’s Richard Bernstein, had called for the S&P 500 to climb 3.9 percent to 1,525.
The index ended the year 41 percent below their estimate, data compiled by Bloomberg show. More than half of the S&P 500’s decline for 2008 came after Lehman Brothers Holdings Inc., once the fourth-largest U.S. securities firm, filed the biggest bankruptcy in history on Sept. 15.
“The thing we all got wrong was that there would be a safety net to catch any and all large financial institutions,” Deutsche Bank’s Chadha said. “Letting Lehman go has had devastating effects.”
Merrill’s Bernstein forecasts a bigger advance for the S&P 500 this year than his 2008 prediction, saying the index will climb 7.9 percent to 975. With global growth likely to “negatively surprise,” the New York-based strategist recommended utilities and makers of household products and drugs in a Dec. 9 note.
‘Textbook and History’
The MSCI World Consumer Staples Index, which includes makers of food, beverages and consumer goods, is valued at 15.2 times earnings, the cheapest since at least 1995, monthly data compiled by Bloomberg show. The MSCI World Health-Care Index ended 2008 valued at 16 times profit after trading at a ratio of 15.1 in November, the cheapest in at least 13 years.
The MSCI World Utilities Index ended 2008 with a dividend yield of 4.4 percent, about twice that of 10-year Treasuries. The ratio was the highest since at least 1995, monthly Bloomberg data show.
“Looking at the textbook and history of the market, it looks like there’s potential for a rally,” said John Carey, the Boston-based investor who runs the $4.64 billion Pioneer Fund that beat 74 percent of its peers last year. “It would be risky to be out of the market right now.”
To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.
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