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

Stock indexes: Up in the air

It has been a roller coaster year for stock indexes. In June, The Dow Jones Industrial Average was up 22% year-over-year from June 2009 but closed the month off with new lows for the year. The Dow started 2010 at around 10,000, crept up to over 11,000 in April and then went back down below 10,000 by June. Movement in the S&P 500 over the year was similar to the Dow, as the S&P was up almost 20% from June 2009 to June 2010 and sat at just over 1,000 at the end of June, down from higher levels in April and May. Analysts are split on where indexes are headed for the rest of the year, with some saying that the outlook is bullish and others saying we’re in for a double-dip recession and the markets are headed lower. And with differing predictions come different ideas on what markets will trade off of for the rest of 2010.

Recent economic reports and news coming from the Federal Reserve point to possible signs of a double-dip recession. New home sales for May were down 33% after government tax credits for new home buyers ended in April. And the short-term boost given to employment numbers by census jobs is gone too. At its June 23 meeting, the Federal Open Market Committee (FOMC) said “Financial conditions have become less supportive of economic growth on balance,” and the pace of economic recovery was likely to only be moderate due to weakness in employment, depressed housing numbers and sinking growth abroad.

Shawn Hackett, president of Hackett Financial Advisors, says stock indexes are likely to trade off of continued deterioration of economic activity for the rest of the year. “Housing and leading economic indicators are showing a deceleration of economic activity and that suggests that the stock market’s current earnings expectations are too high and they’re going to have to recalibrate stocks lower to reflect a much more modest economic environment. That’s going to continue to drive the market to get much more bearish,” he says. Hackett expects a bear market to reemerge by the end of the summer, with equity markets ending the year lower (the Dow at 7,500-8,000 and the S&P at 800-850).

Another stock bear, Addison Wiggin, executive publisher, Agora Financial, agrees that disappointing economic news will drive stock indexes lower. He says stocks are headed for an 18-month bear market, and before it ends the Dow and S&P 500 will both take out the 2009 lows (6,470 in the Dow and 666 in the S&P). “We’ve passed through a historic sucker’s rally that will end this year,” he says. “It looked like the economy was improving in the headlines [during] the spring and that helped contribute to people feeling optimistic about the stock market, but that headline optimism is going to fade before the end of the summer. When people come back in September, we’re going to see a pretty tough fall.”

Some analysts, however, expect economic conditions to improve and thus stock indexes to head higher through the end of the year. Jeffrey Friedman, senior market strategist at Lind Waldock, says housing numbers should improve and low interest rates will help the market go higher in the fourth quarter. “I’m not in the camp of the double dip recession; 1,000 [in the S&P] should hold,” Friedman says, adding that if employment increases at a rate of 50,000 to 100,000 jobs per month, he expects 1,180-1,200 in S&P and 11,000 to 11,200 in the Dow by the end of the year. That may be a tall order as non-farm payroll growth has slowed and would have been flat to negative in the spring if not for part time census hires.

Low interest rates will be key to equities going higher through the end of the year, says Alan Bush, senior financial futures analyst at Archer Financial Services. “This is only a correction in a multi-year bull market. The low interest rate environment will dominate and overpower all the bearish influences, both domestic and international, to take stock indexes higher this year and over the next several years,” he says. At the end of 2010, he predicts the Dow to be at 10,700, the S&P at 1,148 and the Nasdaq at 1,985.

Larry Levin, president of Trading Advantage.com, expects equity markets to continue to move higher on low volume for the rest of the year due to government stimulus (see “Holding back the tide,” below). “We’re in the midst of a correction. It’s not a bear market. The market should be in a bear market, and the economy would make you think it should be in a bear market, but the government intervention is preventing the stock indexes from moving in the same direction as the economy,” he says, adding that he expects the S&P to be at 1,200, the Dow at 11,500 and the Nasdaq above 2,100 by the end of the year.

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