Hard as it is to believe, it has already been a year since Lehman Brothers' implosion and the stock market mayhem that followed. Last fall, Bank of America (NYSE: BAC ) bought Merrill Lynch overnight and AIG (NYSE: AIG ) was sent into cardiac arrest. After the dust settled in early 2009, though, expectations have steadily risen -- and taken the market with them. The S&P 500 has roared back 52% since March, with stocks such as Goldman Sachs (NYSE: GS ) , Apple (Nasdaq: AAPL ) , and Freeport-McMoRan (NYSE: FCX ) rising 80% or more. However, the index still remains 35% below its October 2007 peak.
For insights on where we go from here, I interviewed four experts to see how they see things playing out for the rest of 2009 (and beyond).
Our panel includes Bob Doll, vice chairman and global chief investment officer of equities at BlackRock (NYSE: BLK ) ; David Kelly, chief market strategist at JPMorgan Funds; Uri Landesman, head of global growth at ING Investment Management; and Bernie Schaeffer, chairman and CEO of Schaeffer Investment Research.
The good news is that every one of them is bullish. They expect the rally to continue, but not without a pullback along the way. What follows is an edited version of what they had to say:
As we enter what are traditionally the two worst months of the year, are you bullish or bearish on the stock market for the rest of the year?
Bob Doll: I'm pretty neutral, to be honest, but if you push me into a corner one way or the other, I'll lean to the bullish side. The market has run from a scenario six months ago where people thought the world might end. I think a lot of the rally has been about that view being too negative.
Have we started to bake some recovery in? We have, but the debate of course is how quick will it be, and therein will lie the pattern for the market. I think there is enough skepticism out there, enough cash on the sidelines, and enough improvement of the news that the path of least resistance remains to the upside.
Having said that, I think we'll have a bump sometime between here and the end of the year. Markets never move in a straight line and we're due for a consolidating setback.
David Kelly: The bottom line is that I'm bullish for long-term investors. I don't think that we can profitably try to time which month to get in or out of the market.
For the long term, I think that although the market is off its lows, those lows were extraordinarily low. If you believe the economy will gradually recover over the next few years, then I think there will be very good gains for stocks -- very likely double-digit annual returns on average over the next five years. So I would be overweight stocks.
Uri Landesman: If you held a gun to my head, I'm bullish, with the following caveats: My end-of-the-year target on the S&P is 1135. Now, it's possible that we'll see 900 before going to 1135. So short-term, what's going to determine this market as much as fundamentals is technicals. I think we will see somewhat of a correction over the next two months, with important support at 970, 930, and especially 900 on the way down. The next level up is 1225.
Bernie Schaeffer: We like the market's prospects from here until year-end. The "too far, too fast" mentality is one of several "fear factors" that has kept cash on the sidelines -- cash that might be deployed in the future to drive further gains and contain pullbacks.
The market will bump up against key technical areas along the way, so it won't exactly be a smooth ride higher. Pullbacks should be shallow, despite growing anxiety among many professional traders who continue to fear a sharp pullback as we move into historically weaker months.
What's the catalyst to drive us higher, or lower for that matter?
Doll: For higher, continued evidence that the economy is improving -- lower unemployment claims, slow but steady improvement in the other jobs numbers, continued improvement in leading indicators (which have been screaming higher), more signs that inventories are being rebuilt, and an uptick in business and consumer confidence.
If these all continue to improve as they have now for several months, I think the market will work its way higher. What could set us back, aside from that not coming true and the opposite, is some sort of notable credit bump. I think we'll have some credit bumps, but I think they'll be small enough generally speaking that the market will absorb it.
Kelly: What would drive us higher is just the continuation of better economic news. The problem is that it has been 27 years since we have seen a big recession, and most people don't know what an economy does after a big recession. The truth is after a recession like this, as was the case with the prior two recessions we've had like this, the economy grew by 7% on average in the first year.
No one expected that and I'm not expecting that either, but I think we could easily do 4% GDP growth over the next year. That's a lot more than people expect. So I think this gradual confirmation of close to 4% economic growth is what could power the market higher because it's beyond people's expectations.
What could cause it to go lower? There are plenty. One is oil. I'm very worried about how volatile oil markets have been ... we had a damaging asset bubble in oil in 2008. We could see a resurgence of that, which could be a good recipe for a double-dip recession.
A second thing I worry about is the consumer sector. If consumers decide to save more and more, then that could cause the expansion to stall out.
A third thing I worry about is commercial real estate. There are a lot of losses that are going to have to be taken by banks from commercial real estate loans -- both direct loans and collateralized mortgage obligations. If that affects bank lending, that could be a significant problem.
Landesman: I think confidence throughout the system will be the catalyst for the market to go higher. Confidence from the financial players -- that if they extend credit it will be repaid. Confidence from the borrowers, be they enterprise or consumer, that they've got the ability to repay those loans. Lastly, confidence that the equity that you have in your house is safe and that your job is reasonably safe. It will be gradual.
Schaeffer: Catalysts that could drive us lower are a second-half rebound that does not surface, a Fed that suddenly changes its tone and begins a parade of premature interest-rate increases, or unemployment numbers that become worse than even the darkest projections.
There are numerous catalysts that could send the market higher, which center around a long list of fears that if not realized could move cash off the sidelines and into the market and cause further short covering. In other words, if these fears prove to be invalid or not as bad as advertised, we'd expect buyers to come off the sidelines.
Earnings are still in a position to surprise to the upside, as skeptics abound about cost-cutting being the major driver these days.
Expectations for the consumer are very modest due to debt loads, higher saving rates, and unemployment trends. Yes, this could pressure consumer spending, but to the extent this fear is baked into the stock market already, the expectation bar for the consumer has been lowered, making it easier for positive surprises.
Other fears revolve around the potential for an increase in government regulations and the potential for a commercial real estate market collapse. If the impact of these factors is not as great as expected, or if they do not surface like expected, these would be other catalysts to draw cash off the sidelines and into the stock market.
Where do you think the market is headed, Fool? Let us know by leaving a comment below.
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