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Where is the market heading? Despite renewed optimism, questions linger. Should recovery be as tepid as many fear, what are the implications for the stock market? If the market relapses in the face of sluggish economic growth, what will that mean for cyclical stocks like Goodyear Tire (NYSE: GT ) or blue chips like General Electric (NYSE: GE ) ? Would subpar economic growth equate to subpar returns?
I asked five experts for their thoughts:
- David Kelly, chief market strategist at JPMorgan Funds
- Uri Landesman, head of global growth at ING (NYSE: ING ) Investment Management
- John Linehan, co-director of T. Rowe Price's (Nasdaq: TROW ) U.S. equity division and portfolio manager of the T. Rowe Price Value Fund
- Bernie Schaeffer, chairman and CEO of Schaeffer Investment Research
- Bob Doll, vice chairman and global chief investment officer of equities at BlackRock (NYSE: BLK )
What follows is an edited version of what they had to say:
If the economic recovery is tepid or nonexistent, could the market be stuck in a holding pattern for a year or more?
David Kelly: Of course it is possible, but I think the problem with the stock market is not going to be the pace of an economic recovery. It will be that people have been so burnt by stocks over the last decade that they don't want to buy into the idea again.
There are threats to the economy. I think we'll see a lot of skepticism on the part of investors, and that could cause the stock market to be somewhat halting -- we'll see two steps forward and one step back. But I think it would be a mistake to say we'll be in a holding pattern, because we just don't know that. What we do know is that if the economy fully recovers, the stock market should be much higher.
If you're a long-term investor, and this is money you're not going to be spending in the next five years, I would say that's better than trying to dissect when the stock market might pause for a few months before moving higher.
John Linehan: Anything could be on the table. The market is a very efficient discounting mechanism, and the real question is, if the market believes you will see economic growth at some point in the future, it will start to discount it now. To be stuck in a holding pattern, I think we'd really have to see the economy do nothing for a period of time. The market performance would be congruent with the economic growth at that point.
I think an interesting analogue for today is what went on in 2003. The market bottomed in March 2003. Then it climbed a wall of worry the rest of the year. The whole way up, people were saying that the market was expensive, and that we weren't seeing the necessary growth to justify the upward movement. Yet the market continued to go higher.
Really, what happened is that the market correctly anticipated that you were going to see significant earnings growth in 2004 and 2005, and indeed you did. But the meat of the move in stock prices occurred in 2003.
If you think about today, if we get some recovery, I think the market is going to go higher. However, even if we assume next year is a very good year for corporate earnings -- I think the consensus is 25% plus growth -- and if we assume that the following year is 15% plus growth in earnings, you're still only back to levels we saw in 2007.
It doesn't take a huge stretch to say we could go higher. I think the real question is more, will we get the follow through from economic growth that the market is clearly suggesting we should expect? If we do, I think the market continues to go higher. If we don't, it probably goes a little lower.
Uri Landesman: I think it depends on how you define your terms. It could be somewhat range-bound. My forecast for a year-end price on 2010 right now is around 1250. I'd be looking for an 8% to 12% up year next year, with a possibility of getting more aggressive if I see liquidity opening up, housing bottoming for sure, and unemployment coming down dramatically. Now, that's sitting here today, so I reserve the right to revise that toward the end of the year.
Bernie Schaeffer: If your time frame is longer-term, say 10 to 15 years, yes, we are stuck in a trading range. If you were to go back to 1996, for example, the SPX [S&P 500] could have been said to be locked in trading range between 800 and 1,550.
For bulls, the good news is we are currently at the lower end of that range. But if you go back to March, the market is trending higher, although we have seen a couple trading ranges along the way.
The above being said, should the rally from the March lows proceed like we expect, we continue to expect hesitation periods at key technical resistance areas that test investors' nerves.
For example, the SPX's 80-week moving average lies just overhead at 1,060. The trend line marked a peak in May 2008 following a two-month rally. It was also supportive during pullbacks in August and November 2007. So, we'd expect there could be a battle, should the SPX march toward this trend line, just as battles occurred as the SPX took on its 200-day moving average, and more recently the 1,000 area.
Bob Doll: I think there could be some of that. I still think the path of least resistance will be up, and we'll see higher markets than where we are today. But I think you're right. I think a lot of that will depend on the pace and sustainability of recovery.
I am of the view (as it sounds like you are) that it's not going to be a normal recovery. Out of an economic recession, the first three quarters off the bottom in this country have averaged 7% real growth. We'll be lucky to be close to getting half that, and so I think we have to be cognizant of what that means for earnings, which is pretty important for markets.
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