Springer says the economy is adjusting for a whole new level of supply and demand with the aging baby boomer population playing a major role. “With 78 million people now reaching their savings stage, it’s affecting the economy. That’s the biggest drawback for this market. There aren’t enough spenders out there. Baby boomers are past their peak spending years and are in saving mode.” Despite that, he looks for the Dow to be at 11,700 and the S&P 500 at 1,265 by mid-2010 based on a continued loose monetary policy from the Fed.
Hackett sees limited upside in the market and says a 10% to 20% setback in the stock market could happen at any time. “The market is going to start to price in that the economic recovery is going to be more subdued. If they’re going to price that in advance, they should start to price that in now. A 10% or 20% correction could happen in the first quarter and from there the market could stabilize and meander higher.” For mid- 2010, he predicts a high of 9,000-9,200 in the Dow and 950-970 in the S&P 500.
Larson says, “We show the market to be fairly valued; it’s neither overheated nor compressed and ready for a massive rebound. It could go either way.” He expects both indexes to move 10% higher from late January, to about 1,210 on S&P and about 11,000 on the Dow for mid-2010.
Roscelli says in the S&P, the contract should find initial support at 1,041 as volatility may begin to moderate. He says the Dow should hold support at 9,890. “What’s up in the air is what happens with inflation. If we do start to see some kind of tick up in inflation, then equities will find a boost and money will start to flow into this market, which might allow us to bounce off that 9,900 level and back up to 10,000.”
STOCKS: PICKS AND PANS
With the economy still on shaky ground and many analysts split on general market direction, it may be best to look for specific sectors that could outperform regardless of general market direction. Analysts say this year is a time to protect your portfolio rather than going out on a limb and that means sticking to certain names and sectors.
“Look for high dividend-paying stocks. It’s a year where you want to hold on to what you’ve got, try to make some better money than 0%,” Hackett says. He recommends staying in food and supermarket stocks, healthcare stocks and companies that are not connected to the economic recovery or lack thereof, have a lot of large excess cash flows, are paying large dividends and are unlikely to raise those dividends in 2010. “It’s a year to be defensive. You don’t try to hit the home run or look for something tied to a massive economic recovery,” he says. Hackett recommends staying away from housing, banks, anything tied to construction, and luxury goods, due to a decrease in consumer spending.
Larson agrees that healthcare stocks are looking attractive. “[Healthcare] really sold off hard late in 2009 as health care reform legislation inserted a lot of uncertainty into the market. The sector has bounced back, but it looks 10% undervalued with some names looking more attractive than others,” he says. He says investors should avoid media stocks as audience fragmentation in the broadcast network world due to the Internet and cable continues.
Springer also likes the healthcare sector, including healthcare REITs and companies like Health Care Property Investors Inc. (HCP), which focuses on aging baby boomers and senior healthcare (see “Pick a sector”). He says investors should avoid the consumer discretionary sector. “Stay away from anything consumer-related. The baby boomer situation is the biggest problem for the economy, so the government is making up the difference. They’re spending in the place of the consumer. They can do it for about a year more before [the government] goes broke,” he says.
Roscelli says investors should stay out of the financial sector and recommends REITs, but warns, “You have to do your homework and see which properties are in [each REIT]. There’s going to be opportunity there if you get ones that are managed well.”
Wiggin, too, says financial stocks are a no-go in 2010. “None of the problems [of 2008] have been solved yet. They’ve been papered over with bailouts. Stay away from any of the blue chips that are dependent upon a strong economy in the U.S. or Europe. We’re going to be in this low growth phase for a number of years,” he says, adding, “Companies that depend on retail spending are going to be a nightmare.” Instead, he says investors should focus on companies dealing with emerging technologies such as stem cell research, which benefit from government spending, and look to opportunities in emerging markets like China and India.
STEADY AS SHE GOES
So how can equity investors protect themselves in 2010? Analysts recommend doing your homework and not getting emotional (see “Buy this, not that”).
“Invest with [your] head, not with [your] heart. Many people are buy-and-hold mostly because they’re lazy. An investor must have an exit strategy, but you’ve got to be tactical. If the market looks like it’s going to get hammered, don’t sit through it. Have an exit plan and make a strategy. Don’t be afraid to sell things,” Springer says.
Roscelli says flexibility is important, as is properly balancing your portfolio, including in it things like futures that do well in a volatile environment. “A lot of the easy money has already been made, and that’s the thing investors need to be aware of. Do your homework. Don’t forget about what happened in ’08. Learn from it and add things to your portfolio that will allow you to ride out changes in volatility or turns in the market,” he says.