Investment strategists generally expect the earnings- and economy-fueled rally of the past month to continue, but they're are also looking for opportunities to take profits. Such bullishnessmixed with cautionis likely to continue through 2009 and well into 2010, when the economy is expected to show signs of actual growth rather than just declining at a slower pace.
This trend, often referred to as "second derivative" by market pros, has ruled market moves for the past several months and was in evidence again Friday after a 1 percent drop in gross domestic product fed into the theory that the economy was headed for growth but not quite there yet. "We're on track," said Kurt Karl, chief economist at Swiss Re in New York. "The equity markets will continue to improve along with the economy."
The third quarter is likely to see more of the samemodest improvement in economic numbers and companies fighting for revenue growth on the top linewhile stocks move higher in fits and starts, Karl said. "We haven't seen the end of the uncertainty, so we'll have some volatility in the equity markets," he said. "But we haven't seen the end of the economic improvements, so by late next year we should be looking pretty good in the equity markets."
Since the March lows, stocks have gained dramaticallymore than 40 percent total and about 11 percent in just the past two weeks or soand are having their best July in decades. The rebound is attributable primarily to three factors: A natural bump from what some are calling a generational low; aggressive moves by the government to pump money into the economy, and an earnings season that has featured more companies beating expectations than in years.
With the market being a naturally forward-looking instrument, investors are betting that the economic direction ahead will be mostly upward.We're beyond the halfway point in this recession, so things are getting better," said John Massey, senior vice president and portfolio manager at AIG Sun America Asset Management in New York. "We're going to have a good recovery that's going to take place, but we're going to have sort of a jobless recovery." With that in mind, Massey is planning on consumer spending to be somewhat tepid for now but picking up in 2010.
As an investment strategy, Massey said his firm is rotating out of consumer staples and into consumer discretionary stocks such as casino companies, which are still relatively cheap but will turn into good buys once people can start spending money again. Staying with a longer view, Massey is looking at some plays in housing, though he says that will take more time to develop. Others, though, are looking at more immediate moves, reasoning that once volatility comes back to the market the investing climate will be a bit cloudier than now.
"If you take it when you can get it and it fits the basic philosophy you have about managing your money, God bless," said Diane de Vries Ashley, managing partner at Zenith Capital Partners in Coral Gables, Fla. "We're dipping in slowly. We're sellers of risk and we find this is a nice time to do that." Ashley says her firm is especially bullish on energy, particularly in the alternative space, and is selling some puts and buying calls on the options side. "We're not unhappy with what we're seeing. We're not as pure (with optimism) as some other folks, but we're not unhappy with the sheer optimism," she said. "We're OK with this market, but I wouldn't invest every dime I have in this market right now."
Among the other bullish arguments is a belief that many investors scared by the precipitous drop following the October 2007 all-time highs remain outside of stocksthe "money on the sidelines" argument. Some 21 percent of cash from high net worth individuals remains outside stocks, according to Bank of America Securities-Merrill Lynch. Inflows to funds also remains light, which BofA-Merill Lynch calls a contrarian bullish signal.
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In a research note, the company earlier this week reaffirmed its 1,055-1,065 target this year for the Standard & Poor's 500 . But because the market is catching up to that number, a temporary pullback could be in the wings. "It would be reasonable then to expect the equity markets to correct, so we will begin to look for negative divergences," analyst Mary Ann Bartels wrote. "History suggests a decline between 20%-30% would not be unreasonable to expect."
That sentiment has generated a bit of caution amid the bullishness."This short-term rally I believe is going to continue, but it's going to be a rocky road," Bob Iaccino, of LotusBrokerage.com said on CNBC . For now, many investors seem willing to ride the wave, even if there are a few chills and spills along the way.
"The tendency is for people to be skeptical about recovery and skeptical that the rally can continue," Bruce McCain, head of strategy at Key Private Bank, told CNBC. "We still think that there's quite a bit of cash on the sidelines from people who may be in bonds or in other sorts of investments that will come back to equities and drive this thing further."
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