From the March 01, 2010 issue of Futures Magazine • Subscribe!

Equities 2010: Which stocks will rock?

The outlook for equity markets in 2010 is as muddled as ever after a year that only can be described as enigmatic. Equities had one of the best runs ever off of the March 2009 low, but it sure didn’t feel bullish or that we were in the midst of a recovery. Once there were actual signs of recovery, the market corrected.
Both the Dow Jones Industrial Average and the S&P 500 rose during November and December 2009 and declined in January, with the Dow off nearly 3%. But just because it’s difficult to predict exactly where equities are headed this year doesn’t mean there aren’t opportunities in this market.

Analysts say the forecast is muddled. “People are scared to death right now and that’s when opportunities are made. If you put your emotions aside and focus on statistics, statistics are showing a stronger economy, at least in the first half of the year,” says Keith Springer, president of Capital Financial Advisory Services.

The equities market is looking for a recovery from the economy at large, but no one is quite sure if that recovery will happen in 2010.

“2008 was the year of deflation. 2009 was the year of reflation, and 2010 is the year of indecision,” says Shawn Hackett, president of Hackett Financial Advisors and author of the Money Flow Report newsletter. Hackett says for most of 2009, stocks and commodities markets were pricing in a sharp V-shaped recovery for 2010, but the recovery will be more gradual and equities will need to be repriced to match moderate economic growth. “Some of the earnings expectations that are built into the current stock prices have been overpriced. For 2010 [there will be a] disappointing economic recovery and equities having to correct downward to compensate for downshifting expectations,” he says.

Paul Larson, equities strategist at Morningstar, says the question for 2010 is “where do we go from here?” “In the middle part of 2009, we bounced pretty hard from an economic standpoint. Now that we’ve got the initial bounce, where we go is a difficult question. Does the economy gain additional traction or do we go back down and enter [a] double dip? It’s a tough call,” he says.

Addison Wiggin, executive publisher at Agora Financial, says 2010 will bring the end of what he calls the “sucker’s rally” of 2009, which wasn’t a real recovery. “Over the long run, we’re looking for new lows past the ones we saw in 2008. The rally we’ve seen is one of the longest recession rallies in history and it’s not going to last and when it starts falling it’s going to fall pretty hard,” he says. “We’re going to be in a bear market all year and it’s going to be difficult for people to be enthusiastic.”

Springer disagrees, saying equities are going to be much stronger than people expect. “Professional money managers have been bullish on this rally all along, but the individual investor has been incredibly bearish and remains that way, but not until they throw in the towel and start buying will this rally be over. Professionals are only calling for a 5-10% move in the market. [We could] see a 15-20% move through the first half of the year because the numbers are much stronger than people expect. The two most important things for a stock market rally are liquidity, and we’ve got a ton of it, and low interest rates.”

And speaking of low interest rates, analysts agree that the Federal Reserve is unlikely to raise interest rates in the near future. Some say not until 2011, with fall 2010 being the earliest prediction (see “Moving target,” right). What the Fed does or doesn’t do will have an impact on equities.

“[Federal Reserve Chairman Ben] Bernanke’s likely to do things in moderation. The market would be able to deal with a gradual rate rise without having an issue with it. [Raising rates] wouldn’t be a negative factor. For the first three rate rises, the stock market tends to do very well,” Hackett says, adding, “They’re not going to be raising rates in 2010. It’s a non-issue. Growth [isn’t] going to warrant it.”

Larson says it’s unclear when the Fed will raise rates, probably not until late 2010 at the earliest. “You’re going to see a lot of withdrawal of liquidity-enhancing measures at the Fed. Interest rates may be one of the things that get moved when the Fed mops up this excess liquidity. The interest rate move will be one of the last moves [the Fed] takes, not one of the first.”

Richard Roscelli, broker at Whitehall Investment Management of Las Vegas, agrees that the Fed is unlikely to act until late in the year. “They’ve got a very narrow window [to] raise rates. It’s going to have to be very gradual, unless you see a real, sustainable move up with the employment figure,” he says.

Springer says the Fed will not raise interest rates this year. “The Fed does what it says it’s going to do. The Federal Reserve and the Fed bankers have decided interest rates will not go up in 2010, and I would believe not through 2011,” he says, adding that continued government stimulus is still positive for the market. “Liquidity is coming in droves by the U.S. government. Nobody likes that it’s coming from the government, but the market doesn’t know where it’s coming from. Money is money. I’m positive on the stock market for the first half, and the economy [will] start to rally.”

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